Mislabeling “Sub-Contractors” Who Are Actually Employees
Mislabeling an employee as a subcontractor can be a costly error. If the IRS or the Department of Labor determines you have misclassified an employee as a subcontractor and thus failed to pay state and local taxes, you will be required to pay those taxes on past wages and may also be subject to hefty fines. All it takes is one of your subcontractors filing an unemployment claim or sending a report to the IRS to trigger an audit of all of your subcontractors.
This is not a light matter because “misclassification of employees” is being given increased scrutiny by the IRS, Department of Labor and State Labor Boards. Some of the motivation for this new effort is to generate more taxes and fees to remedy the large shortfalls in unemployment funds.
Here are two examples of the real cost of misclassifying employees (New York Times STEVEN GREENHOUSE, February 17, 2010 )
California’s attorney general, Jerry Brown won a $13 million judgment when a court ruled that two companies had misclassified 300 janitors, cheated the state out of payroll taxes and not paid minimum wage and overtime.
Last November, the Illinois Department of Labor imposed $328,500 in penalties on a home improvement company for misclassifying 18 workers, saying it had pressed them to incorporate as separate business entities.
If you are unsure how to classify a worker you can get information from the IRS site or your accounting professional.
If you want to bring on an employee for a short term project or spot jobs, resist the urge to call them a subcontractor when they are really an employee. You are far safer to keep it legal and either bring them in as an employee or utilize a staffing service.
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