Misclassification of Employees As Independent Contractors - Who Is Being Classified?

Who Is Being Classified?

Employers must report the incomes of employees and independent contractors using the IRS form W-2 and 1099, respectively. Employers pay different taxes (i.e. Social Security and Medicare taxes, unemployment taxes, etc.) on the wages of a worker that is classified as an employee. However, these same taxes are generally not paid by the employer on the compensation of a worker classified as an independent contractor. If an employer intentionally or mistakenly classifies an employee as an independent contractor, the employer is then at risk for being heavily fined and paying back-taxes.

Being classified as an independent contractor also affects whether an employee can receive unemployment benefits. In many states, independent contractors are not eligible for unemployment benefits because nothing has been paid into the unemployment insurance fund on their behalf. Employers who have no W-2 employees are not required to make payments to the unemployment insurance fund, and since no one can file a claim for benefits, they don't have to worry about their accounts being charged any extra. So should a misclassified employee lose his job through no fault of his own, that employee has no recourse with the Department of Labor and no unemployment benefits upon which to fall back.

Construction workers are often the most misclassified workers in the industry of the United States, Europe, and the Middle East. Workers are misclassified for the employers to reap a different benefit, such as paying fewer taxes and paying less benefit, and workers are paid incorrectly. Organizations fighting against this fraud are shown below.