For Clients: 1099 Risk

Understanding the Risks Associated with IC Compliance

The number of contingent workers in the U.S. is growing rapidly, and independent contractors (ICs) make up the fastest-growing component. As a result, regulatory authorities tasked with ensuring workforce rights and tax compliance are looking upon IC-client relationships with increasing scrutiny.

In short, businesses open themselves up to risk when they classify workers as ICs when they are actually working in an employee capacity (as defined by the IRS). As business are liable for significant penalties regardless of whether or not their misclassification is intentional, understanding the differences between employees and contractors is critical.

The primary IC-related risks fall into three categories:

•  Reclassification: Occurs when the IRS or state tax authorities reclassify contractors as W-2 employees, imposing fines, penalties, and back-taxes.
  
• Co-Employment: Occurs when contractors are used fundamentally the same way as employees but are denied employee benefits. [more]
  
• Liability: Occurs when contractors lacking proper liability or workers compensation insurance become injured on the job or cause their client damages through poor work.

The financial threat associated with these risk factors can be substantial. For example, when the IRS reclassifies contractors as employees, penalties often exceed 35% of payments to the reclassified ICs-which can easily stretch into the millions of dollars. Co-employment risk (as demonstrated in the infamous Microsoft case and the more recent FedEx lawsuit) can be even more devastating.

Very often, the settlements or penalties associated with contingent workforce transgressions are only the beginning of a business's troubles. Companies found to commit workforce-related improprieties are open to amplified scrutiny for years to come.