There are many small decisions that business leaders make that could have major implications for their company. Decisions related to talent acquisition can have an outsized impact on the reputation, performance and finances of the company.
Every new hire creates financial responsibility and also puts the company at risk of issues stemming from interpersonal conflict or incompetent job performance. A company’s obligations to direct-hire employees can make staffing expansions somewhat risky.
Sometimes, managers or human resources professionals might hire new workers as independent contractors rather than employees. Provided that they truly do work with the professional on a project basis, that classification may be reasonable. However, many companies misclassify workers who they actually treat as employees.
Misclassification can lead to controversy
Many workers don’t understand the implications of accepting a job as an independent contractor until they get hurt on the job, lose their position or need to file their annual income tax return. When workers realize that their employers hired them as independent contractors but treat them like employees, they may take legal action.
Workers misclassified by their employers sometimes challenge their classification because they believe they have not received the wages they deserve or because they need workers’ compensation benefits after getting hurt on the job. Occasionally, worker claims about misclassification can lead to tax controversies for the businesses that misclassified the professionals.
Employers should make tax contributions
Companies choose to classify workers as independent contractors to avoid benefit obligations, reduce insurance expenses and limit other secondary expenses associated with hiring new employees. Payroll tax contributions are among the potential savings businesses enjoy when they classify workers as independent contractors.
Typically, businesses have to make certain income tax contributions based on the value of an employee’s labor. However, independent contractors cover all of their employment taxes on their own behalf. The failure to make appropriate payroll tax contributions could lead to allegations that a company underpaid its taxes.
The employer may have a sizable tax bill due after a worker challenges their classification as an independent contractor. In fact, the employer may also owe interest and penalties. The costs associated with an income tax controversy related to misclassification can dwarf the savings obtained through classifying workers as independent contractors.
Responding assertively to allegations of tax underpayment can help businesses avoid mounting expenses and other legal consequences. Employers hiring professionals as independent contractors may need to keep thorough records to protect against allegations of income tax underpayment later.