The independent contractor and the audit

Lawsuits against companies like Uber and Grubhub have become commonplace because of worker classification.

These companies offer a service. That service requires drivers. Those drivers are classified as independent contractors. Uber and Grubhub don’t have to pay payroll taxes or offer benefits to independent contractors.

When the Affordable Care Act (ACA) was enacted, federal agencies became concerned employers would misclassify their workers as independent contractors because the ACA requirements for employee health benefits do not apply to independent contractors. The Internal Revenue Service (IRS) has been conducting a larger number of audits due to this concern.

If an employer is unsure whether or not workers are correctly classified as independent contractors, the IRS 20-Factor Test is a good starting point.

A large number of “no” marks implies workers are most likely independent contractors while a large number of “yes” marks implies workers are­­ most likely employees.

There are options employers can take to help resolve employee classification errors and reduce penalty costs. To qualify, employers must prove reporting consistency throughout the years, classification consistency among all workers, and good reason for classifying the position as independent contractor.

The Classification Settlement Program (CSP) can resolve classification errors and lower the tax assessment to one tax year if an employer is currently under audit.

The Voluntary Classification Settlement Program (VCSP) allows employers to reclassify their workforce if they have not been audited within three years. This program significantly reduces penalties and offers audit forgiveness on misclassification from prior years.

With heightened media coverage of classification lawsuits and the influx of IRS audits, employers may want to re-evaluate whether or not their independent contractors should actually be employees to help avoid future penalties.