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Worker Classification and the Affordable Care Act

The federal government is always on the lookout for businesses that improperly classify workers as independent contractors rather than employees. But the heat was recently turned up even more.

The issue of worker classification has many tax and benefit implications and it continues to be problematic for employers.

If you incorrectly treat a worker who is actually an employee as an independent contractor, your company could be assessed unpaid payroll taxes plus interest and penalties. It also could be liable for employee benefits that should have been provided but weren’t, including significant penalties under federal laws. In addition, businesses with misclassified workers also generally owe taxes and penalties to their states.

Many businesses prefer to classify workers as independent contractors to lower costs, even if it means having less control over workers’ day-to-day activities. Federal and state government agencies have always cracked down on businesses that classify workers as independent contractors to evade taxes or sidestep providing benefits. Now there’s another reason to focus on worker classifications: Employers may treat individuals as independent contractors to avoid health insurance obligations that involve employee headcounts under the Affordable Care Act.

Note: Be aware that a worker or a business can file a form with the IRS to ask for a determination about classification. Disgruntled former workers may file the form to show that a business improperly denied employee benefits by classifying them as independent contractors. Businesses should consult with their tax advisers before filing this form because it may alert the IRS to worker classification issues — and inadvertently trigger an employment tax audit.

Worker classification is a complex issue. Contact us if you have questions about the status of an individual or the filing of 1099 forms by using the form below.

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