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1099 Independent Contractor or Employee?

Federal and state agencies have been stepping up enforcement efforts against employers across a range of industries for improperly classifying employees as independent contractors. Beginning in February 2010, the U.S. Internal Revenue Service began auditing 6,000 employers through a national research program. Audits will take place over three years.

The IRS uses a 20-factor test to determine worker status. Employers that misclassify workers as independent contractors when they should have been classified as employees can be held liable for a number of federal and state taxes, including income, unemployment, and workers' compensation. Complicating matters for employers, different governmental agencies employ different classification standards. Moreover, the existence of an independent contractor agreement is not, by itself, determinative of a worker's status. Such contracts may be disregarded if the nature of the relationship appears contrary to the written agreement.

As the majority of states continue to struggle with decreasing revenues, it is likely that enforcement efforts at the state level will also continue to ramp up. Recently the Illinois Department of Labor announced that, pursuant to the Illinois Employee Classification Act, it had levied a $328,500 fine against a Chicago contractor after discovering that the contractor had misclassified 18 of its employees as independent contractors.

A handful of states, including Colorado, Maryland, Massachusetts, and New Mexico, have recently enacted laws aimed at employee misclassification in the construction industry. It is anticipated that many states will follow suit and seek to enact employee misclassification laws

Click 1099 Employee Classification Audits to review how HRStaffers can audit your current 1099 independent contractors and help you avoid misclassification fees and penalties.