In their efforts to lower operational costs and maximize returns, some employers may resort to deliberate payroll-tax evasion strategies like deliberate employee misclassification. Some legitimate employees can deliberately be misclassified as contractors, and thus, the employers can strategically evade paying unemployment taxes or their portion of payroll taxes and other legally stipulated employee benefits.
Employee misclassification is associated with the tax law and sheer violation of the labor law. The IRS is fully aware of these schemes and is hunting down employers engaged in this dangerous malpractice that denies taxpayers their rights as well as Uncle Sam millions of dollars annually.
Employee misclassification is common in industries where workers suffer wage violations. These workers work for very long hours and are paid poorly. This does not only affect the well being of the employees, but that of their whole families, who rely on them for survival.
In their efforts to end work-related mistreatment, a partnered venture involving the U.S. Department of Labor, the IRS, and State labor departments encouraged mutual information sharing. To their surprise, they discovered that Uncle Sam is being swindled millions of dollars due to an alarmingly high amount of misclassified employees.
It is because of this that the ‘Voluntary Classification Settlement Program’ was launched by the IRS in September 2011. The program was mainly meant to persuade the falsifying employers to correctly reclassify the workers. This official pardon encourages companies to make the necessary amendments before an IRS audit is performed, which will investigate and penalise them for any unpaid taxes as a result of misclassification of workers.
The federal investigators on the other end ensure the workers are listed on the payrolls. In case an employee believes that he or she is being misclassified, they are encouraged to inform the federal agents. The biggest challenge facing this initiative is fear of the consequences of turning in your boss; you may just be shown the door the moment the federal investigators step out of the company gates.
Since the employers have control over their employees, it becomes their responsibility to split the FICA tax payments with their employees. Workers misclassified as contractors have to pay Social Security and Medicare taxes entirely on their own, which is very unfair, especially if their wages are pretty low.
Employees who feel that they are being misclassified are encouraged to talk to their employers about this issue. There are however, some employers who would rather keep you as a contractor for as long as they wish, but not as an employee. If they fail to act, then you can simply file the IRS Form SS-8 and let the IRS will look into the matter before acting accordingly.