Tax Fraud or Simple Employee Misclassification?

freelance contractorRecently there has been a lot of conversation about the differences between gig workers and employees. The State of California recently sued ride-hailing companies Lyft and Uber for misclassifying their drivers as independent contractors instead of employees.


Classifying employees as independent contractors has been around as long as employers started providing benefits. Employees may enjoy a host of benefits that contract workers with their company may not. Some of those benefits include:


  • Structured wages
  • Family and medical leave
  • Health insurance
  • Overtime
  • Workers’ compensation
  • Unemployment insurance


Sometimes a worker may offer services under substantially the same conditions as a hired employee, but remain classified as an independent contractor. Some of the criteria that contribute to that determination are the location of work performed, how work projects are developed and controlled, how well integrated the services offered by the employee are to the company, along with other factors.


While workers wrongly classified as independent contactors miss out on social net and other benefits, employers who misclassify employees usually benefit. Among liabilities employers do not have to pay for gig workers are health insurance premiums, payment and withholding of social security and unemployment benefits, or workers’ compensation premiums.


Although it is not difficult to classify an employee as a gig worker, the arrangement may turn sour if the worker applies for unemployment or is injured and seeks workers’ comp benefits. While many workers are afraid to speak up about misclassification, some inequities are coming to light as stimulus programs are developed to offer paycheck and unemployment support for certain types of employees.


Employers who wrongly classify employees may face new heat when furloughed and laid off workers seek stimulus payments to which they believe they are entitled—only to learn their employer has misclassified their status.


In an employment tax dispute, business owners who misclassify workers can be liable for past and current employment taxes and payments that should have been made on behalf of a properly classified employee. The IRS will work with an employer to evaluate the basis upon which the misclassification occurred—but considerable taxes may still be due.


Best bet? Make sure your employees are properly classified. If you use independent contractors, steer clear of the financial and project control that typifies an employee more than a 1099 worker. And if the IRS contacts you to discuss a payroll tax issue? Call a good tax attorney first.


Skilled IRS tax lawyers representing high wealth individuals domestically and abroad

From offices in Chicago and Cleveland, the legal professionals at Robert J. Fedor, Esq., LLC work with individual and corporate clients to avoid and mitigate allegations of tax crime. When you need experienced legal advice on a civil or criminal tax matter, contact us today at 800-579-0997 or contact us.


Understanding Tax Fraud