Subadhra Sriram's Blog

A Misclassification Moment with the IRS

Google the word “misclassification” and you get around 1.16 million hits. It is also the number one search term on Staffing Industry Analysts’ website. So it was no surprise that much of the conversation at the CWS Risk Forum in Las Vegas on the 5th and 6th of October was around misclassification. Three representatives from the Internal Revenue Service  made an appearance and spoke on the topic to a full house of 300- plus contingent workforce managers, attorneys and  risk officers. 

What was surprising was the fact that the IRS doesn’t care whether a worker is an IC or a w-2. In a casual conversation with them over lunch, I learned that,contrary to popular sentiment, it’s not that the IRS wants a worker to be classified as a W-2. Just that the worker is properly classified and the appropriate taxes are paid.

Of course, if a worker is an independent contractor or 1099 (named after the form used to report their income), companies should make sure they have the required insurance, a W-9 form, an EIN (employer id number), all the necessary documentation (business cards, licenses) and more than one client. You definitely don’t want to be the IC’s only customer;  that is an obvious red flag. A good place to start before you delve deeper into whether your worker is an IC or not would be to go back and read the IRS guidelines on its three-factor test.

Also, make sure that you get an attorney to sign off on what you are doing. There is so much information floating around on this subject, you don’t want to be misled. The IRS may provide the guidelines, but worker misclassification decisions are made on a case-by-case basis.

 

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