The Importance of Correctly Classifying Independent Contractors

If you misclassify your workers, you can get into legal trouble with the IRS, the Department of Labor, state taxing authorities, and the misclassified worker.

The IRS is interested in how

you classify your workers for one reason: revenue. Since companies don't have to pay for workers' compensation and FICA taxes when using the services of an independent contractor, the IRS misses out on revenue.

In fact, some statistics claim that the IRS is stuck with a $29 billion gap due to uncollected taxes, questionable business expense deductions, and loss of government program funding. In recent years, the IRS has reclassified thousands of workers and raised close to $1 billion in back taxes, interest, and penalties.

Recently, courts have also begun to examine whether misclassified workers are wrongfully excluded from company benefits such as health care, stock options, and 401(k) plans. Many independent contractors have brought suits against companies who hired them to perform the same work as full-time employees, but provided them with none of the benefits that the full-timers received. After working with permanent employees and listening to how their stock is going to soar after their joint project is finished, or how the full-time employee is going to take a three-week paid vacation as soon as the work crunch passes, many independent contractors have started to feel slighted by their lack of benefits.