On December 14, 2022, the Internal Revenue Service (IRS) and the U.S. Department of Labor (DOL) announced that they are renewing a memorandum of understanding (MOU), which allows the two agencies to collaborate in their efforts to address employee misclassification.
The goal of the MOU is to streamline investigations into businesses that misclassify their employees as independent contractors.
What Does the MOU Say?
The MOU lays out the following responsibilities for the IRS and DOL:
- Evaluating employment tax referrals provided by DOL that meet the standardized criteria and conducting examinations to determine compliance with employment tax laws;
- Providing annual reports to DOL summarizing the results achieved by using DOL referrals. In accordance with legal requirements, reports will protect return information, including taxpayer identities.
- When requested by DOL, IRS will inform the Labor Department of any new or revised employment tax training materials
- Referring information that may raise Internal Revenue employment tax compliance issues related to misclassification to the IRS. Referrals will be at DOL’s discretion and consistent with applicable law.
- Sharing training materials and opportunities with the IRS SB/SE to the extent possible.
Together, the DOL and IRS may coordinate outreach activities relating to worker classification and other issues of mutual interest.
The MOU makes it clear that the DOL and IRS will collaborate specifically on cases that:
- Determine employee status
- Concern businesses that are still in operation
- Concern businesses with an average dollar volume of at least $500,000Concern businesses that do not issue 1099 forms
- Concern businesses that treat workers inconsistently
While the line between employee and contract worker is often a little blurry, the Department of Labor has created the following guidelines to help distinguish them:
- Works for someone else’s business
- Is paid hourly, by salary, or by piece rate
- Uses employer’s materials, tools, and equipment
- Typically works for one employer
- Has a continuing relationship with the employer
- Employer decides when and how work will be performed
- Employer assigns the work to be performed
- Runs their own business
- Paid upon completion of project
- Provides own materials, tools, and equipment
- Works with multiple clients
- Temporary relationship until project completed
- Decides when and how they will perform the work
- Decides what work they will do
Effects of Misclassification
The effects of misclassification can be serious. Law-abiding businesses have a harder time competing with companies that cut costs by misclassifying workers. Companies that misclassify workers, either intentionally or by accident, risk substantial financial penalties as well as damage to their reputation.
Workers who are misclassified as contract employees may miss out on important benefits, including retirement plans, health insurance, unemployment insurance, worker’s compensation, overtime pay, and paid and unpaid leave.
Finally, misclassification costs federal and state governments billions of dollars each year in tax revenue.
What Does This Mean for You?
Under the federal tax code, the Fair Labor Standards Act, and state and federal labor laws, employers who fail to properly classify workers risk tax penalties, lawsuits, and fines. Businesses should take the time to assess their workers’ classifications in order to mitigate the risk of tax and other penalties.
Whether you are running a business or working as an individual, Tonneson’s CPAs can help ensure that you are filing and paying the appropriate taxes for your situation.
Contact us today to learn how we can help.
If you’re interested in working with Tonneson + Co, please reach out to us. We look forward to hearing from you!
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