Worker Classification Update

Labor & Employment Law, Taxation
July 26, 2017

On July 20, 2017, the Internal Revenue Service (“IRS”) issued a reminder for small businesses on the importance of correctly classifying workers as employees or independent contractors. Employers failing to do this correctly may face penalties, including trust fund penalties, from the IRS, which can be assessed not only against the employer but also against officers and directors. Classification is important because an employer must withhold income taxes and pay Social Security, Medicare taxes, and unemployment tax on wages paid to workers who are employees, but independent contractors are instead subject to self-employment tax.

Employers must look at the facts in each situation. The IRS has reminded small businesses to focus on three categories to properly classify workers: (1) behavioral control, (2) financial control, and (3) the relationship of the parties. A worker is properly classified as an employee if the employer exercises significant behavioral and financial control over the worker such as controlling the manner of work by giving the worker instructions or training and providing the worker with the tools necessary to complete the work. Also, if the employer and the worker have a permanent working relationship and the employer provides the worker with benefits such as a pension plan or vacation pay, the worker properly would be classified as an employee. On the other hand, a worker should be treated as an independent contractor if the worker has autonomy on deciding the manner of work and amount of hours to work, works for multiple employers, or does not retain a permanent relationship with the employer. These factors all reflect a 20-factor test established by the IRS in Revenue Ruling 87-41.2

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IRS Hiring Additional Agents, Providing Additional Resources for Misclassification Enforcement

by Scott Braddock
Wed, 05/25/2016 – 7:53am

The recent announcement by the IRS Commissioner that the agency is moving forward with hiring hundreds of additional agents has sparked a debate about exactly how those new resources should be utilized. Some leaders in the construction industry have told Construction Citizen that if the government has more people on hand to enforce the law, proper classification of workers should be a priority.

Misclassification is the practice of designating an employee as a “1099 worker” or an independent contractor when that person, by law, should be compensated as an employee.

Unscrupulous employers do it as a way of sidestepping payroll taxes, unemployment taxes, and workers’ compensation insurance. Even though there are many legitimate uses of contract labor, abuse of the classification gives cheating companies an ability to submit lower bids for projects, undercutting ethical contractors who follow the letter of the law.

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DOL is Watching: Are You properly Classifying Employees?

posted on: Wednesday, September 16, 2015


Recently, the United States Department of Labor (DOL) issued an Administrator’s Interpretation regarding the classification of independent contractors under the Fair Labor Standards Act (FLSA or Act). Much has been written about this “interpretation.” In review, the interpretation is best understood as an aspirational view based on an administrative belief that all workers should be employees. While DOL’s interpretation is supported by case law, in many cases, the supporting law constitutes minority or aberrational positions. Whether DOL’s position is ultimately sustained by the courts or not, it is important to understand DOL’s enforcement position.

The DOL takes the position that “most workers are employees under the FLSA’s broad definitions.” This pronouncement strongly signals that the DOL will continue to aggressively pursue misclassification claims. The DOL has entered into memoranda of understanding with at least 25 state enforcement agencies, as well as the IRS, in order to bring enforcement actions regarding alleged misclassifications.

Cheating by Unethical Employers Reaches Crisis Levels While Texas Lawmakers Sit on Their Hands

by Scott Braddock on Wed, 04/08/2015 – 5:46am


Over the years, the Construction Citizen team has put a bright spotlight on the myriad problems caused by worker misclassification. Those difficulties continue to mount while Texas lawmakers do very little about it, much to the frustration of ethical companies that cannot compete with cheaters, many single mothers who are denied child support payments, conservative activists upset about illegal immigration, and workers’ rights advocates who believe in a better standard of living for those who toil in the hot Texas sun.

Worker misclassification is one of the major underlying problems when it comes to fixing all those challenges.

If you’re unfamiliar, worker misclassification is a fancy term for cheating on payroll. That’s why labor activists call it “payroll fraud.” It happens when a boss pretends their worker is an “independent subcontractor” instead of an employee even when, by law, the person should be on the books as an employee. Many employers do this with the goal of avoiding payroll taxes, workers’ compensation coverage, and other benefits and protections in place when there is a true employer-employee relationship. Keep in mind that there are many legitimate uses of contract labor, but the IRS has legal definitions for who is an employee and who is a contractor.

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Hillsboro businessman convicted of tax evasion

By Brent Weisberg
Published: September 30, 2014, 8:05 am

PORTLAND, Ore. (KOIN 6) – A 53-year-old man was ordered by a federal judge to pay the Internal Revenue Service (IRS) close to $500,000 and spend a year and a half in federal prison after pleading guilty to federal tax evasion.

Stephen Gregory Nagy was the former president of Hillsboro-based S&S Drywall Assemblies. According to the United States Attorney’s Office, Nagy’s company produced drywall services from January 2005 through September 2011.

The IRS assessed the company $481,519 in federal employment taxes, penalties and interest for between June 2009 and September 2010. Nagy met with the IRS and committed to a plan to pay the past due payroll taxes for his company, but investigators said he decided not to comply with the payment play and engaged “in a variety of interrelated fraudulent schemes to evade the payment of the delinquent payroll taxes.”

Investigators learned that he started conducting extensive business transactions in order to hide funds from the IRS. He obtained cash by illegally hiring undocumented workers to work on prevailing wage jobs, paying them a small portion of the prevailing hourly rate and demanding that they kick back the largest part of their wages to him in cash, court documents state. Nagy failed to report the case to the IRS.

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