Boards are tempted to classify workers as independent contractors so they can save money by avoiding payroll taxes, health benefits, and workers' compensation insurance. They also avoid benefits like paid sick leave, vacation, or health insurance. Instead, they write the person a check and file a 1099 income form if the check is over $600. However, to do so now is more risky due to the federal government's implementation of its new initiative: Questionable Employment Tax Practice (QETP).
Consequences of Misclassification. Under QETP, federal and state auditors scrutinize independent contractor agreements. Whenever there is a question about a worker's classification, governmental agencies start with the presumption that the worker is an employee. If an auditor determines a worker is improperly classified, the employer may be required to pay penalties, including the following:
- Federal and state income tax for the previous three years;
- Employee's share of Federal Insurance Contributions Act (FICA) taxes and the employer's matching amount;
- Federal unemployment taxes of 6.2% of each employee's compensation up to $7,000.00, and state unemployment insurance equal to 3.4% of compensation up to $7,000.00; and
- 0.5% of the total amount of the debt per month for up to 50 months (6% annually) with the possibility of additional penalties for substantial understatement or fraud (applicable in cases where the employer failed to file correct information returns, furnish correct payroll statements, and comply with information reporting requirements).
Factors for Determining Status. There are a number of factors used to determine whether a worker is an employee or an independent contractor. The California Supreme Court changes the factors and made classifying someone as an independent contractor much more difficult. See "Independent Contractor."
Avoiding Misclassification. To avoid misclassification, associations should limit the use of "full-time" independent contractors, and instead hire workers on a specific project basis. Additionally, associations should treat workers similarly in similar situations. In other words, if the job duties of two employees are the same or similar, do not hire one as an independent contractor and the other as a W-2 employee. Further, keep employment relationships consistent. Do not convert an independent contractor to a W-2 employee status. Last, use independent contractor agreements that highlight the components of independent contractor status so as to withstand the scrutiny of federal and state auditors.
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