Ep 41 – The IRS Says Your Employee Classification Is Wrong

Welcome to the new Workology Go Podcast. In just under five minutes, we get you the HR and workplace news you need before you start your day. Get ready, get set and go with the Workology Go Podcast.

Here are today’s HR and workplace news headlines from Workology Go Podcast. I’m Jessica Miller-Merrell. The Workology Go Podcast is sponsored by Workology.

Ep 41 – The IRS Says Your Employee Classification Is Wrong

Between 2010 and 2015, the number of taxpayers penalized for underpaying estimated taxes increased nearly 40%, according to IRS data, and the rise of the gig economy is often cited as a contributing factor to these numbers.

As a writer, speaker and consultant I’ve spent a lot of time as a freelancer. As a corporate HR leader, I understand how classifications can be a challenge. As the gig economy continues to grow, it’s interesting because the IRS and the bureau of labor statistics really have no idea how many gig workers there actually are in the U.S.

Forbes reported in 2018 there were 57 million gig workers in the U.S. and 29% of US workers have side gigs and alternative employment.

But back to employee misclassification, solving the problem of worker misclassification starts with having the right policies and regulation in place. Today, states, government officials, and individual businesses are working on a variety of initiatives to help combat this issue.

Many states have created task forces, commissions, and research teams to investigate instances of employee misclassification and gather data. Targeted audits conducted by some of these task forces have helped to recover millions of dollars. In 2013, for example, New York’s Joint Enforcement Task force on Employee Misclassification identified nearly 24,000 instances of employee misclassification, discovered over $333.4 million in unreported wages, and assessed over $12.2 million in UI contributions.

Today’s featured article comes from MBO Partners and is titled, “Employee vs. Contractor: Worker Classification and the IRS.

Why is working as a freelancer so attractive to this workforce? I talked with Heide Brandes, a freelancer writer on why she left the comforts of being a traditional employee and go freelance.

Honestly, it’s the absolute freedom I have. When you say you are you are your own boss. I really am my own boss. I can choose to sleep in that day and not get any work done, i.e. not get paid that day. Or I can I can work from anywhere. I spent a month in Africa, but as long as I have Wi-Fi, I can still work. And, you know, that’s what I really love about it is the absolute freedom to be able to do the amount of work I want when I want to do it, where I want to do it and not have the traditional constraints as an off environment. I remember there are times when I was working in non-profit, I’d be done by noon. But I wouldn’t to be able to leave because, well, traditionally I’m supposed to stay there till 5:00. That’s what they’re paying me to do. And I’m a very fast worker. So that was always very frustrating to me. I honestly, I love the freedom of being my own boss and I can choose which articles I write in newspapers. Sometimes you get to have to write articles feel like I really don’t want to write this, but you’d have to because it’s your job now as a freelancer and a contractor I can accept the work. I can deny work. I pick and choose which pieces I want to. And that’s very satisfying as well.

It’s a lot more control over your work hours, your flexibility and the work that you’re doing.

Oh, yes, absolutely. Absolutely. But there is a downside to it as well.

We’ll talk a little bit about that. So the downside. What what is that?

Well, the downside is the lack of security. You know, if you’re in an office environment, your traditional employee, you know exactly how much you’re gonna get every paycheck, every two weeks. I start every month. I have no idea where I’m going to make this month. It would be nice to have more retainer clients where I know I have, you know, X amount of money coming from this client, X amount of money from this client. I usually do. But, you know, I think that is one of the scariest things when people start considering freelancing is the total insecurity of your finances. Some months I make, you know, X amount of money and some months I fall way short and I start looking at who’s hiring for Uber, you know?

Freelancing offers great flexibility for those workers. However, many employers like to hire freelancers instead of employees because of the cost savings for them.

Misclassification of employees is expensive. It’s 50 for each W-2 that the employer failed to file. Penalties of 1.5 percent of wages, 40 percent of FICA taxes not withheld from employee, and 100 percent of the employer FICA taxes. A Failure to Pay Taxes penalty equal to 0.5 percent of the unpaid tax liability for each month, up to 25 percent of the total tax liability.

I’ve included some resources in the transcript of this podcast to determine if your contractors are really employees. You may remember what was called the 20 factor test. It is now been compressed into three general categories: 1) behavioral control,  2) financial control, 3) relationship of the parties. Have you done an audit of your freelance workforce to see if they might be misclassified?

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And that’s this episode of the Workology Go Podcast sponsored by Workology. We’re your go to for HR and workplace news. To learn more about the Workology Go Podcast, subscribe to us on Apple, Google, and Stitcher. Our podcast is also available on Alexa and Google Home. Learn more at workology.com/gopodcast and access this episodes resources, links and reports for more information.

Featured Story

Employee vs. Contractor: Worker Classification and the IRS

More Great Resource

Ep 110 – Who Is Really the Freelance Workforce?

Work with Independent Contractors? How to Avoid an IRS Crackdown

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Jessica Miller-Merrell

Learn more about Jessica Miller-Merrell, SPHR, SHRM-SCP, the founder of Workology, a workplace HR resource, and the host of the Workology Podcast. More of her blogs can be found here.


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