Why Misclassification Happens?
To understand this, we need to answer - Why do employers intentionally indulge into the practice of employee misclassification?
Well, the fact is that employers are responsible for paying different taxes on account of the employee wages they give. Social Security taxes and Medicare taxes are two examples of the employee taxes every employer needs to pay.
On the other hand, employers are not responsible for paying any such tax for independent contractors working for their company. So, in an attempt to reduce the tax burden, employers might classify their employees as independent contractors.
Who Are Independent Contractors?
Independent contractors are the individuals, businesses or corporations that sign contract with one or more organizations to provide goods and services to them. Another common name used for these service providers is freelancers. These independent contractors are responsible for paying their own taxes.
For example, a certified personal accountant hired to take care of business accounting is an independent contractor. Another example is that of an engineering consultant hired by an engineering product manufacturing company. Some of the other examples of independent contractors are lawyers, real estate agents, stock brokers, private security providers, translators, trainers and sales representatives.
Common Laws to Avoid Misclassification
Considering an increase in the cases of employee misclassification, the IRS has taken the initiative to help employers classify their workers as employees and independent contractors.
Common laws exercised by the IRS are described below:
Need of Classification
Classification of a worker as an employee or an independent contractor is important for the following reasons:
How to Perform Classification?
A compliance officer should be hired to help employers classify their workers as employees and independent contractors. An evaluation of each worker of the organization is done and related reports are prepared. In some cases, an independent contractor might show interest to become an employee for the organization. If the employer decides to hire this person, the related documents must be prepared for the tax audit. If the employer is not able to classify one of the workers to the right category, the IRS form SS-8 must be used.
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