Even after years of increased enforcement, 1099 independent contractor (IC) misclassification is a common employment violation. And the risks associated with worker misclassification are only increasing as government agencies coordinate their enforcement efforts. Companies look to recruiters as employment experts, so it is important you know the basics of proper worker classification and stay on top of the latest enforcement efforts.
When companies classify workers as independent contractors they don’t pay the employer share of FUTA, SUTA, and FICA taxes. They also don’t pay workers’ compensation or offer ICs benefits. Companies can save approximately $3,710 annually on each $20/hour worker in FUTA and FICA taxes alone by 
classifying them as ICs, according to the Treasury Inspector General for Tax Administration. When you add the employer cost of workers’ compensation and benefits for a W-2 employee, the financial impact is dramatic.
Some workers also prefer the IC classification due to tax advantages, including the ability to write off business expenses on their tax returns.
Proper classification is not up to the worker, the client, or the recruiter. The IRS guidelines dictate how workers are to be classified. These include a number of factors falling into three main categories:
For more information, see the IRS discussion of how to determine worker classification. You can also ask the IRS to help you decide the proper classification. File Form SS-8, “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.”
IRS misclassification audits are widely feared by employers. But the IRS isn’t the only sheriff in town. The government has collected more than $9.5 million in back wages for more than 11,400 workers in just two years. Through its Misclassification Initiative, the Department of Labor (DOL) has hired 350 investigators and has signed memorandums of understanding to share information with the IRS and 14 states. This significantly ups the financial ramifications for misclassifying workers, including:
Don’t assume that you or your clients are too small to be noticed. These “red flags” can set the government’s sights on even the smallest companies:
As you can see, worker misclassification is risky. Encourage clients to audit their workforces to ensure their ICs are properly classified. You can help by offering to convert their 1099 ICs to W-2 employees and outsourcing the employment of those workers to a contract staffing back-office. That way, your clients can still receive the value their workers provide without the administrative and financial burdens of employing or the risk involved with making them ICs.