New California law (and IRS) focuses on worker misclassification

Employee vs. independent contractor — it’s not just a matter of semantics

There’s nothing new about the battle between the IRS (and other agencies) and businesses that classify workers as independent contractors primarily to save money on taxes and benefits. In the past, the legal battlefield was a bit of a slippery slope based on common-law tests and loose interpretation. Sometimes the government wins these cases, sometimes not.

A new state law and an IRS program are beefing up the government’s tools for handling employers who “willfully” misclassify employees. In short, classifying an employee as an independent contractor, when you have no reasonable basis for doing so, can expose you to the possibility of penalties and interest – in addition to the employer taxes and other fees that should have been paid on employee wages. Here are some of the recent events:

The IRS and the Department of Labor have agreed to begin sharing information regarding employee misclassification.

California Senate Bill 459 – effective January 1, 2012, increases employer penalties for voluntarily and knowingly misclassifying the status of a worker.

IRS Voluntary Classification Settlement Program – announced September 21, 2011, provides a pathway for eligible businesses to get a “fresh start” (no interest and penalties, but a “small” fee) with the IRS after having consistently misclassified workers. Sounds great, however, this only applies to your IRS liability, not EDD or other state agencies, and additional collateral issues may exist.

This also includes housekeepers and caregivers – yes, the scope of this discussion includes employment of household help.

With these new events and increased government focus, it’s time to review your employee classifications. Some are even suggesting consulting with an attorney before classifying any worker as an independent contractor.

It will take some time and cases to fully define the new rules and how they will work, exactly. Even so, there’s a lot more we do know that cannot be covered in a few bullet points. We recently sent out an email alert regarding worker misclassification and how it might affect your business. You can read the whole email alert, and use the half-dozen resource links at the bottom, by visiting our website (spscpa.com), clicking on the “newsletters & newsflashes” tab at the top of the screen and then click the headline: Newsflash – SPS Email Alert Dec 2011.

We’re ready to help you sort through the options for your specific situation.