Classifying an employee as an independent contractor has come under close scrutiny by the Internal Revenue Service (IRS), and both federal and state Departments of Labor (DOL). The federal government has estimated that worker misclassification costs several billion dollars annually in loss of tax revenue. The problem of employee misclassification is so pervasive that all levels of governmental agencies have intensified efforts to “crack down” on the practice.
The temptation to classify a worker as an independent contractor can be great, considering that employers do not pay unemployment insurance taxes, overtime pay, workers’ compensation premium, or the employer’s portion of Social Security and Medicare taxes for independent contractors. Also, such workers generally are not eligible for fringe benefits such as medical coverage or retirement benefits.
Until very recently, the IRS didn’t share information or coordinate efforts to combat employee misclassification with federal and state DOL agencies. This comes to an end now as the US DOL and the IRS and 11 states agreed to coordinate enforcement efforts.