New York, N.Y. – As concerns over inappropriately classifying employees as independent contractors continue to grow, low industry-wide unemployment and the math are simply not adding up, according to Withum Tax Manager Marcus Dyer, Esq., CPA, and C.J. Stroh, Esq., a senior member of the firm’s National Tax Services Group. Withum is a national top-ranking advisory and public accounting firm with offices in New York City.
“Wages are not reconciling with the industry’s growth, thus suggesting an increase in worker misclassification all in the name of reducing costs and gaining construction contracts,” explained Dyer. “This is a big problem for the construction industry as a whole and a red flag for government enforcement.”
Generally, an employer/employee relationship exists “when the person for whom services are performed has the right to control and direct the individual who performs the services, not only with regard to accomplishing the work but also as to the details and means by which that is accomplished,” according to Stroh.
As a result of misclassification, the employee loses federal and state employment protections and benefits and the unlawful business benefits from illegally lowered taxes. In turn, this gives the latter an unfair advantage over the competition when it comes to RFPs. A third party – the government – also is deprived of substantial tax revenues.
In an effort to prevent the misclassification of workers, the IRS is focusing on identifying offenders through four integral sources. These include the Determination of Worker Status (Form SS-8) Program; Employment Tax Examination Program (ETEP); general employment tax examination; and Questionable Employment Tax Practices (QETP) Program.
“Whether a worker is an employee or an independent contractor is sometimes difficult to discern,” added Dyer. “To make the distinction, the IRS has compiled a list of 20 factors related to worker-status determination. In New York State specifically, the state’s Construction Industry Fair Play Act – instituted in October, 2016 – imposes its own standard and penalties.”
Under the Fair Play Act, individuals working for a construction-industry employer are presumed to be employees unless they fully meet three criteria. The New York law also contains a 12-part test for determining when a sole proprietor, partnership, corporation or other entity will be considered a separate business entity from the contractor for whom it is providing a service.
Consequences of Misclassification
Companies found to have misclassified workers are subject to substantial financial consequences. In addition to being required to pay 100% of the employer’s share of Social Security and Medicare taxes, there is an additional 40% fee on the same obligations and 3% of the wages. Once again, New York State has its own civil penalties as well as the potential for criminal prosecution.
“For well-intentioned employers seeking to right the ship, there is good news: companies that have consistently treated workers as independent contractors may be able to lessen or avoid harsh consequences,” said Stroh. “If cost savings is the end that justifies the means of misclassifying employees, think twice. It may end up costing you more – as well as your reputation.”
For more than 40 years, Withum’s Construction Services Group has been offering clients specialized accounting, technology and business advisory services to increase profitability across all industry sectors. This highly specialized team of partners, senior accountants and managers serve contractors, homebuilders, distributors, suppliers, manufacturers, dealers, recyclers, demolishers and service providers.