If you have clients who have 1099 independent contractors (ICs), you will want to make sure they are aware of the government's latest initiative to crackdown on worker misclassification.

While there are situations where paying workers on 1099 is perfectly legal, many employers abuse the classification, labeling workers who should be employees as ICs.  This results in the loss of tax revenue for state and federal government agencies.  The Obama administration has been particularly strict about worker misclassification and is upping the ante again with the 2015 Fiscal Year Budget.

The new budget, set to take effect in October 2014, allocates $14 million to the Department of Labor (DOL) for preventing and detecting worker misclassification.  A large amount ($10 million) is earmarked for grants to help individual states identify misclassification and recoup unpaid taxes. This is an extension of the DOL's Misclassification Initiative in which the agency signed Memorandums of Understanding with the IRS and several states agreeing to share information about possible misclassification. The DOL has already collected over $18.2 million in back wages for more than 19,000 workers representing a 97% increase in back wages since the implementation of the Initiative.

You may receive pressure from your client companies and candidates to use the IC classification due to the tax advantages that both parties can enjoy. The pressure from companies will likely only get more intense as when the employer mandate of the Affordable Care Act (ACA) kicks in. But the proper classification not up to the client, candidate, or recruiter. It is determined by the IRS guidelines, which can be reviewed at http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/...

Thanks to the DOL’s Misclassification Initiative, companies can now be hit with fines, penalties, back taxes, back wages, etc., from several government agencies now that they are sharing information. You can help clients avoid this fate by recommending that they audit their workforces against the IRS guidelines. And if they determine that some of their ICs are misclassification, you can offer to convert them to W-2 employees and outsource their employment to a contract staffing back-office. This provides a much safer way for companies to reduce the their employment costs and administrative burden without having to worry about the IRS looking over their shoulder. 

This article is for informational purposes only and should not be considered legal advice.

Debbie Fledderjohann is the President of Top Echelon Contracting, Inc.