Misclassification vs. “Payroll Fraud”

As Federal and State agencies seek to narrow the tax gap, a new bill was recently introduced that puts independent contractor misclassification back in the forefront of the national labor and tax agenda.

Undeterred that two misclassification bills introduced in 2010 never made it out of Committee, the sponsors of the new bill are trying to drum up support  by characterizing misclassification as a form of  “payroll fraud.” – a term that invokes white collar criminality rather than an innocent oversight that is denoted by the word “misclassification”. It would appear that ignorance is no longer a defense in the eyes of the law…. 


A press release for the bill can be found here. The press release states "according to a study released in February 2009 by the Ohio Attorney General’s office, Ohio loses at least $160 million a year to each year from worker misclassification."

Should the bill pass here is what it would mean for businesses...

• Penalties for misclassification, up to $5,000 per employee, which could be staggering for the companies that are knowingly or unknowingly 'misclassifying' a significant amount of workers as 1099.
• It would be the one of the first federal laws where businesses must give newly hired workers a federally prescribed notice.
• The law would cover independent contractors who provide services through a corporation or an LLC and not just on an individual basis. 
• The bill would still allow companies to continue to pay workers on a 1099 basis – provided it is an appropriate relationship. 

-         Explaining the purposes of the new bill one of the sponsors states that the bill would “relieve the burden on American taxpayers who foot the bill when businesses” mis-classify workers. 

Read our post on 1099 misclassification for more information.