No money to conduct random audits? Are furloughs wreaking havoc on your ability to deploy auditors?  One state finds a creative way to uncover a few employees and drum up payroll taxes simply by advertising free self-classification classes! 

 Iowa Workforce Development is advertising assistance with proper worker classification to contractors. Just think in one hour you too can become an expert in worker classification.  You will learn how to tell the difference between an employee and independent contractor and determine if you are properly classified!  The goal at the end of the class is to make you an expert and help the state reduce the number of misclassified workers in Iowa.  “Getting the classification correct is critical for tax, wage, unemployment, workers’ compensation and other employment issues.   Getting it wrong can cost an employer$$”.

This offering is just another example of what lengths the states will go to in order to demonstrate the renewed emphasis of enforcement by federal and state regulators.  Misclassified workers step forward to be reclassified; employers are identified then fined resulting in a new flow of future payroll tax revenues.  What a great way to get the cash flowing into the state and federal governments empty coffers! 

ICE is at it again!   It seems there is no shortage of funds for this group of auditors and it crew. The round up for undocumented workers continues but one has to wonder if ICE has a secret benefactor.   Where other governmental agencies are struggling to pay resources to help get its arms around other illegal hiring practices, ICE continues to keep the cash flowing.   This is one agency that has yet to go to the well for money and find it’s dry….fist full of dollars.

The 652 businesses being presented with a NOI today for a I-9 audit have been selected as a result of leads and information obtained through informants and other investigative means.   In April 2009, ICE implemented a new strategy to help curtail illegal employer hiring practices to reduce the demand for undocumented workers in the U.S.   This nationwide initiative is being launched today as a direct result of this new strategy.

According to an unofficial report obtained by the Associated Press yesterday Michigan auditing officials discovered a staggering number of misclassified workers who were paid as independent contractors during an audit.

Although actual dollars in wages of the misclassified workers in the state of Michigan are unknown the Government Accountability Office reports that employee misclassification on the federal level accounted for the underpayment of an estimated $2.72 billion in Social Security taxes, unemployment insurance taxes and income tax and clearly Michigan has contributed to these numbers.

The weight of this scheme has negatively impacted everyone but the employers who got away with it as evidenced by the financial burden bourn by employers who are doing the right thing, workers on all sides and public sponsored programs that faded into the background due budget cuts. The broken independent contractor model is not unique to the state of Michigan but an actual pandemic across the nation. You can’t open a newspaper, turn on the news or read my blog without hearing about a number of employer misclassification cases and they continue to stack up.

 
I think these types of headlines coupled with the lure of the potential revenue dollars as a direct result of huge fines and penalties will be reason enough for these states to maintain the chase. With the tax man pushing at the state and federal level keeping Michigan and the rest hopping may just be the ticket  that moves the states in the red closer to the black.

Create an agreement that defines a specific and closed-ended project.

This agreement should be detailed enough to define the expected deliverables, dates and total amount of the project. When creating the agreement, be careful to focus on a specific project, which should be filled by a contractor, rather than a general need (more indicative of an employee relationship). The agreement should focus more on the expected outcome of the project and less on the methods of achieving this outcome. Not enough emphasis is often placed on this agreement, which is crucial in defining the relationship.

Use contractors who have already established their business.

It is important to ensure the contractor has solidified their status as a contractor before engaging in an agreement. Expertise and experience aside, new research from the U.S. Bureau of Labor Statistics indicates that most failures of American startups will occur in the first two years of their existence. All it takes to initiate an audit of your company is one former 1099 heading to the unemployment office and filing an obstructed claim.

Avoid immediately rehiring recent your W2 employees as contractors

Paying out a 1099 and a W2 to the same social security number in the same tax year not only signals a red flag out for auditing agencies, it loops back into the topic of engaging with an unestablished businesses. It is best to incorporate a break in service to let the contractor establish other clients and invest in their business. Becoming the workers primary source of income sets the business up for failure and makes the relationship look more like an employee-employer one.

Key word = Independent

Ensure the relationship and work agreement reflect that your contractor is operating independently. IRS and state auditing agencies focus on three areas of concern: behavioral control, financial control and the relationship of the parties overall. This all boils down to control and independence. Review each of these factors and ensure that the independence is being maintained. Ensure the contractor has not become an integral part of your organization and is instead an independent worker who has been utilized to provide a specialized and closed ended project.

For more information regarding employee classification guidelines be sure to visit the IRS website.