Independent Contractor Compliance Blog

Washington DC-As part of a coordinated effort to crack down on worker misclassification, the Obama administration recently announced that it has directed both the Treasury Department (IRS) and the Department of Labor to increase enforcement on companies that treat workers as independent contractors when their job duties are actually those of an employee.

Federal budget is being increased to target violators.

The proposed federal budget for fiscal 2011 includes an additional $25 million for the Department of Labor (DOL). The money will be used to hire an additional 100 investigators to target misclassified workers in a joint initiative with the Department of the Treasury (IRS). The IRS has already received funding for an additional 4500 agents to help close the Tax Gap.

The IRS currently estimates the Tax Gap to be at least $350 billion per year.

The government’s stake in worker misclassification

Estimates by the Treasury Department assert this initiative alone will increase federal tax receipts by more than $7 billion over 10 years. The federal government believes it is losing tax revenue by not receiving withholding income taxes, paying Social Security or Medicare taxes, or contributing to workers’ compensation and unemployment insurance for misclassified workers.

Not included in the $7 billion figure above is an unknown amount of lost revenue from workers who file “unauthorized Schedule C’s.” These are workers who receive a Form 1099, but the IRS believes they would be determined misclassified if the agency had the resources to ferret them out. Receiving a Form 1099 allows these workers to claim business deductions against their income on a Schedule C they would not be entitled to claim as an employee receiving a W-2.

Unions have a stake in worker misclassification too

The unions are also pushing the Obama administration for tougher IC compliance. They want more individuals eligible for membership (IC’s don’t join unions) and assert misclassified workers are missing out on benefits and legal protections that are available to union members. Labor unions believe that up to 30 percent of workers being treated as IC’s are actually misclassified.

Will this budget infusion really make much of a difference?

The DOL adding only 100 new investigators to seek out misclassified workers nationwide is mostly symbolic. But it does represent one more nail in the misclassification coffin for businesses that can not prove they are properly classifying their contractors and consultants.

It is the current trend

Concurrently, there are numerous actions being taken at both state and federal levels to close the misclassification gap and to generate more tax revenues. According to lawmakers these actions are intended to throw a net over the worker classification issue and catch any business that is “just labeling its employees as IC’s and therefore gaining an advantage over their competition and taking advantage of the individual worker who just wants to make a living.”

Now is the time to protect your business. Collabrus can help!