Quite often in my client advisory work for Collabrus I present a company with their options if they want to continue down the path of engaging a misclassified, high-end consultant. It usually looks something like this:
- Hire the consultant as your employee. (This option allows you to safely engage the worker without the risk of misclassification but adds to your full-time headcount and reduces your flexibility when the project is over.)
- Employ the consultant as a Collabrus employee (W-2) to complete the project. (This option allows you to economically engage this valuable worker’s services utilizing Collabrus as the employer-of-record for the duration of the project, with a full benefits package, without incurring a risk of misclassification).
- Select another consultant for the project who qualifies as an Independent Contractor, or adjust the project so that it supports an IC status. (This is not always a feasible option, and may not afford the expertise and functional utility required for the project).
- Engage this consultant directly as your Independent Contractor for the project. In this scenario the client would issue a 1099 at the end of the year to the IC. (This option will expose you to a misclassification risk and potential tax liability).
Not all advisories end this way. Sometimes the consultant and project clearly qualify for IC status and this advisory is not needed. However, I often need to tell clients they are at risk because they are misclassifying their consultants or have not taken the proper precautions to protect themselves.
The risk is very real.
Today, it’s not just a single agency, like California’s Employment Development Department (EDD), or the IRS that you must be concerned about.
It’s both of them, plus others.
In today’s budget-starved environment enforcement agencies are sharing information and working together in partnership. When one finds out you have misclassified workers they tell the others.
To read more about these partnerships, see: IRS and States to Share Employment Tax Examination Results on Misclassified Workers
Saving money is important, but don’t be seduced by hollow, short-term savings.
Too often clients come to me after they have been hit with an audit by a state or federal tax agency. At this point it is too late. Their options are limited after the IRS, or a state agency like EDD, has already knocked on their door. These companies learn the hard way that the cost of getting caught with misclassifications is much greater than the few dollars they were trying to save.
- The statute of limitations for employment tax assessments is three years, or more.
- Whenever a tax agency investigates the misclassification of one consultant in a company, it will typically review all consultants classified as IC’s in that company. Multiply the cost of one consultant by the number of all potentially misclassified consultants.
- Tax and enforcement agencies share information, so there is a domino effect of visits by other agencies, with the fines, penalties and assessments…
- After the audits are completed, it is common for the consultants to learn of the ruling and decide they are entitled to full employee benefits. This adds the expense of civil law suits, costing far more than the original issue.
Protect yourself before and during the engagement-not after the consultant is gone and you are being audited.
Engaging an IC compliance expert to help you properly qualify and engage your IC’s and temporary workers is a small, upfront investment that will help to avoid these risks. And for the temporary consultants that legally must be classified as employees, using a company like Collabrus can be an intelligent, cost-saving strategy-a way to have your contingent workers and be safe too!