Annually, we caution business owners about the DANGERS of employee misclassification. This is a serious problem with serious ramifications. It happens when an employer hires a worker and erroneously classifies that person as an “independent contractor” instead of an “employee”. Often times, employers commit misclassification by issuing an “IRS Form 1099” and a contract, referring to a person as an independent contractor; yet treating them like an employee. The difference between the two comes down to the “right to control”. The IRS has developed a very specific test with several factors to determine Contractor v. Employee status. Michigan courts have developed a test as well.
Employers that make this mistake avoid paying income taxes, FICA taxes, unemployment taxes and workers’ compensation premiums. In many cases, this is why the decision is made- to save money and a headache. However, short cuts on the front end are not worth the expense on the back end! The way the law and regulations look at this practice, workers lose many protections afforded to them such as unemployment compensation, access to labor law protections and employer-based benefits. Sounds good for the employer, right? Classify them as independent contractors and avoid taxes? NO! Do NOT take a chance. The Michigan Unemployment Insurance Agency has cracked down. Field auditors are using information furnished by the IRS to find employee misclassification and recoup unpaid taxes.
Harsh penalties can result if this common mistake is discovered. Do the right thing! Questions? Concerns? Contact GLLG today!