Misclassification of Employees as Independent Contractors

If your company has delivery drivers who are paid as independent contractors, you may be putting your business at risk. The misclassification of employees as independent contractors has become a focus of enforcement efforts by both the Department of Labor (DOL) and the Internal Revenue Service (IRS).

What Is Misclassification of Employees as Independent Contractors?

The Department of Labor has begun an initiative to identify employers who treat delivery drivers as independent contractors when they should be classified as employees. Two recent DOL audits have resulted in employers paying penalties for violating the Fair Labor Standards Act, as well as back wages to delivery drivers who were not on the payroll.

IRS and DOL Audit Risks for Worker Misclassification

When workers are misclassified, their wages are not being subjected to payroll taxes. As a result, companies are also risking an IRS audit, which could result in interest and penalties on unpaid employment taxes.

With the IRS hiring more auditors, there is a greater likelihood that businesses that misclassify workers will be subject to IRS audits in the future. In addition to federal tax exposure, employers may face state-level penalties and wage claims.

The following cases highlight recent Department of Labor enforcement actions and penalties related to the misclassification of employees as independent contractors:

• USPack Logistics Boston
• Sarpino’s Pizzeria Chicago

Employee vs Independent Contractor: How to Determine Proper Classification

If delivery drivers support a key aspect of your business and you can control what they do and how it is done, it is likely your drivers should be receiving a W-2 at the end of the year and not a 1099.

Worker classification depends on the level of control and independence in the relationship. Don’t wait for a DOL or IRS audit to find out whether your workers have been properly classified.

For more information on how to determine whether your workers are employees or independent contractors, visit:

• The Misclassification of Employees as Independent Contractors, Department of Labor page (DOL.gov)
• Independent Contractor (Self-Employed) or Employee?, Internal Revenue Service (IRS.gov)

How Siepert Can Help With Worker Classification and Payroll Compliance

Have questions on how to get your delivery drivers added to the payroll? Contact your Siepert & Co., LLP payroll processor or call our office to speak to one of our accountants.