IRS Crackdown on Independent Contractor Classification

Employers beware – or at least be aware – the IRS is cracking down on businesses who violate the the legal terms of working with an independent contractors.

The IRS said it would begin a three-year study of the issue this month. State crackdowns include:

– New York: A multi-agency team reported finding nearly 31,500 cases of employee misclassification and nearly $390 million in unreported wages from Sept. 2007 and the end of 2009. It had ordered employers to pay more than $28 million in past-due wages, taxes and penalties.

New York’s numbers were up significantly. Its team found 12,300 misclassification cases in the 16 months ending in December 2008; by a year later it had found about 19,200 more.

– California: Orange County prosecutors said last year they would seek $38 million from a couple for workers’ compensation fraud for failing to pay premiums and submitting claims for 42 injured but uninsured workers at their construction companies.

– Florida: A 2008 statewide grand jury found some construction contractors conspired with check-cashing stores to fake payments to a bogus subcontractor, cash the checks themselves and pay workers cash, under the table.

– Ohio: The state’s Bureau of Workers’ Compensation ruled last year that a former state attorney general’s top aide improperly classified all four employees at his Youngstown construction firm; on appeal only two were found misclassified. The state won’t say how much he owes in restitution.

I realize that I’ve gone over this issue ad nauseum, but it seems that some employers still don’t get it.

As much as I’d like to insist they follow the rules, all we can do in HR is advise. And document, document, document.

For I truly believe that a little CYA never hurt anyone, especially HR.

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