Misclassification of employees is a problem that impacts employers, workers and government. When workers are misclassified, they may not qualify for certain benefits, while government loses important tax revenues. The only party to benefit through misclassification is the non-compliant employer who achieves an unfair business advantage over its competition.
Misclassification most commonly occurs when an employer hires a worker and improperly classifies them as an independent contractor rather than as an employee.
UIA created Fact Sheet 155- Independent Contractor or Employee to help employers properly classify a person’s services.
What is an employee? The employer determines what needs to be done and controls how it is to be done. The person is normally directed by the employer.
What is an independent contractor? They are not employees but are in business for themselves. They are hired to accomplish a task or tasks as determined by the employer, but independent contractors retain the right to control how they will get the work done. Generally, an independent contractor performs a specialized service that is not central to the overall function of the business.
How are wages reported? Independent contractors should receive from employers Internal Revenue Service Form 1099-MISC, which reports payment of "non-employee compensation." Employees receive a W-2.
Often, wages for part-time, temporary, probationary, substitute and casual labor workers are misclassified, as well. Although a worker's job may be less than permanent or full-time, the worker is still an employee. Misclassification also occurs when workers operate in the "underground economy" and are typically paid in cash. The wages these workers receive are not reported, and the workers do not receive a 1099 form or a W-2 from their employers.
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