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IRS Teaming Up With State Workforce Agencies to Snag Misclassified Workers

The IRS is teaming up with various state agencies to identify and catch worker misclassification tax cases. In other words, the IRS is putting more pressure on employers to correctly classify their workers as either employees or independent contractors. As you may know, employers do not have to pay employment taxes (FICA and Medicare) for independent contractors, but do for employees. According to IRS chief of employment tax, the agreement between the IRS and state employment enforcement agencies provides for data sharing and the referral of tax cases which will make it easier for the IRS to conduct audits of employers who allegedly misclassify their workers in an effort to avoid the employment tax. The Labor Department, the National Association of State Workforce Agencies, the Federation of Tax Advisers, and workforce agencies in California, Michigan, New Jersey and North Carolina have all agreed to the accord with the IRS.

The IRS hopes this measure will force employers into stricter compliance with employment tax regulations, as well as minimize the employment tax reporting portion of the tax gap. While we cannot say whether this will be the effect, we can say that this measure means that the IRS will have access to these agencies’ data on employers’ compliance with the employment tax, exposing more employers to tax liability. Moreover, the agreement calls for the state agencies to provide the IRS with leads on employment tax cases, and for the IRS to train state workforce agency examiners to more easily recognize misclassification.

It’s important then, that you audit your wage and hour practices now, before the IRS does. Work with counsel, you accounting and HR departments to ensure that you are properly classifying your employees and that you are paying the proper taxes on each one.

Brody and Associates regularly assists management in assuring that it is in compliance with all Wage and Hour and other employment-related laws, as well as conducts HR audits to assure compliance. If we can be of assistance in this area, please contact us at info@brodyandassociates.com or 203.965.0560.