What is the cost of worker misclassification? This is when workers are classified as independent contractors, when they really should be employees. It’s not just up to the boss; there are laws that determine who’s what. The key factor is the extent to which the employer controls the worker, in terms of hours and supervision, and whose equipment the worker is using.
If someone is an independent contractor, they will be issued a Form 1099, and will be responsible for paying income tax and Social Security and Medicare tax. If someone is an employee, the employer withholds taxes, pays an employer’s share into Medicare and Social Security, and pays into worker compensation and unemployment insurance funds.
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Jay Rowell, director of the Illinois Department of Employment Security, says misclassification allows violators to under-cut their honest competitors by 25 to 30 percent, and that’s not all. “The law-abiding employer is going to end up covering the cost for the unemployment insurance for that employer that’s misclassifying, because we’re still gonna pay out benefits, because that person’s an employee, but that misclassifying employer isn’t paying into the system,” he said.
The state has been diligent in sniffing this out, auditing companies when there’s no record of employee status for unemployment insurance claimants, or when the IRS or Illinois Department of Revenue notices taxes not being paid.
The department audited 3,635 employers in 2013, and discovered 19,765 misclassified workers who earned $245.6 million in taxable wages and $5.1 million in unreported contributions that fund unemployment insurance benefits – and that’s just what’s known from the audits. Rowell says workers who think they’re misclassified, or businesses who believe their competitors are misclassifying workers, can blow the whistle at www.IllinoisMisclassification.com.