Worker Classification | Employee Relationships | Rea CPA

Are You Properly Classifying Your Workers?

Why Misclassifying Employees Could Cost You

You may employ hundreds, if not thousands of employees. Or maybe you only employ a handful. Regardless of the number of people you have working for you, the way you classify your workers is important to the federal government. Worker status is a hot button issue at the IRS, and Ohio’s Department of Job and Family Services, the Ohio Bureau of Workers’ Compensation and the U.S. Department of Labor are also challenging the way businesses report their payments to “independent contractors.”

How To Determine Worker Classification

Facts that the courts have considered to determine whether a worker is an independent contractor or an employee fall into three categories:

  • Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
  • Financial: Are the business aspects of the worker’s job controlled by the payer? (Considerations include how the worker is paid, whether expenses are reimbursed, and who provides tools/supplies.)
  • Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay)? Is the relationship continuous and is the work being performed a key aspect of the business?

It’s critical to weigh all these factors when determining whether a worker is an employee or independent contractor. Focus on the entire relationship, consider the degree or extent of the right to direct and control, and document the factors you used in coming up with the determination. Simply having a contract stating that the worker is an independent contractor isn’t going to cut it.


Listen to episode 166, “Become A Payroll Perfectionist,” on Rea’s award-winning podcast, unsuitable on Rea Radio, for payroll insight from Dee Gray.

Consequences Of Having Misclassified Workers

Over the past few years, the IRS has conducted thousands of random audits, many of which focus on several payroll and fringe benefit issues – one being worker misclassification.

What would happen if the IRS reclassified some of your workers from “contractor” to “employee” status? Some consequences of a reclassification are as follows:

  • You may owe additional payroll taxes
  • If workers are reclassified, this could affect your pension and fringe benefit plans as well (if those workers should have been included in the plans, but were not)
  • Reclassifications could trigger employer insurance mandates as directed by the Affordable Care Act

Potential penalties imposed due to reclassifications vary depending on whether the misclassification was intentional or unintentional. Companies that are not currently under audit can voluntarily correct errors and pay a lower penalty. Also, there are protections in place if a company has consistently filed Forms 1099 for the workers in question and all other similar workers.

This is a complicated area for employers. All signs indicate that the IRS will continue its efforts to identify misclassified workers. Don’t get caught with unexpected tax liabilities or penalties. If you feel that your company may have exposure for worker reclassifications if you were to be audited and you would like help, email Rea & Associates. We can help you outline a plan of action to get into compliance with this law.

By Dee Gray, CPP (New Philadelphia office)


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