It’s an age-old story. Employee classification – or, rather, misclassification.
The regulatory agencies with oversight, the Internal Revenue Service, the Department of Labor and state agencies, have all stepped up enforcement in the normal course of their activities. And don’t be surprised if compliance with the Affordable Care Act adds additional emphasis to their enforcement efforts.
Why the concern? The financial consequences of misclassification could be costly in terms of income tax withholding; other employment related payments such as FICA, FUTA, state unemployment, and workers’ compensation; and retroactive inclusion in the retirement program and health insurance benefits.
The State of Illinois Department of Employment Security (IDES) guidance says,
But with all due respect to the IDES, not exactly easy. Whether a worker is an independent contractor or employee is about the degree of control and independence in the business relationship. Among the dimensions:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer, e.g., how the worker is paid, whether expenses are reimbursed, who provides tools/supplies?
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay)? Will the relationship continue and is the work performed a key aspect of the business?
In other words, worker classification is based on the facts and circumstances of each individual situation. Our advice to clients in these matters is simple. Consult a qualified tax advisor. This is another one of those "kids, don't try this at home" matters.
Jerry Kalish is President of National Benefit Services, Inc., an independent Chicago-based firm providing retirement plan consulting, actuarial and administration services. He has been publishing the firm’s blog,
