Improper Employee Classification Has the Potential to Result in Penalties

Rental and staging companies, as well as tour sound and satellite uplink companies, now face an imminent insurance risk that could potentially cost them hundreds of thousands of dollars in penalties. As the federal and states governments' budgets continue to shrink, they are becoming increasingly eager to find additional sources of tax revenue -- and maximizing the effectiveness of current tax regulations is one way to achieve this objective.

According to Take1 Insurance executive vice president and program director, Scott Carroll, "rental and staging, tour sound, and satellite uplink owner/operators have always relied heavily on 1099 independent contract workers. But by all reasonable IRS and Department of Labor (DOL) definitions, the vast majority of today's 1099 workers do not meet the requirements that determine who qualifies as an independent contractor. Now a growing number of states, along with the IRS and the DOL, are taking a hard look at companies who utilize the 1099 tax form for their employees, specifically to determine how 1099 workers are utilized and instructed versus how they are classified on tax forms."

Caroll continues: "In California, for example, as of January 1, 2012, when the California Department of Labor determines that a 1099 was misclassified, the employer can be slapped with a fine ranging anywhere from $5,000 to $15,000, and all the way up to $25,000 if it is determined that the misclassification was intentional and used to avoid liability for workers compensation payments."

Companies in the film and TV production industry have already begun to classify workers as "temporary employees" rather than 1099 independent contract workers. This change has the potential to increase the cost of doing business for the affected companies, as the more comprehensive regulations being deployed will create new tax obligations for the companies. However, companies who think they can get away with improper filings and do not ensure all employees are classified correctly will face the possibility of paying major fines in addition to being held responsible for the unpaid taxes, the company says.

How does a company owner find out if they should file a worker as a 1099 independent contractor or as a temporary employee? To start, employers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing form SS-8, Determination of Workers Status for Purposed of Federal Employment Taxes and Income Tax Withholding, with the IRS.

"Basically, it comes down to a couple criteria they use to determine the accurate tax status of an employee, and it is addressed on a case-by-case basis," Carroll says. "To start, if the business owner has the right to directly control how the work is done through instructions, training, or other means, the workers are most likely temporary employees. If however, the owner can direct or control only the final result of the work, and not the means or methods of accomplishing the result, the workers are probably independent contractors. Additional factors include whether the business has a right to direct or control the financial and business aspects of the worker's job, and how the workers and the business owner perceive their relationship."

Carroll continues, "With this increase in tax law enforcement across the country, the implications for rental and staging business owners are astounding. Owners who may not even know they are at risk of exposure to fines and additional tax burdens could find themselves owing up to hundreds of thousands of dollars to the state or the IRS, and that is surely enough to disrupt or bankrupt a company. Because of this, Take1 is working with CAPS Payroll Services to develop a turnkey solution that will help our clients ensure they meet the proper tax guidelines and avoid hefty government penalties."

"Normally, an employer would be responsible for their employees' insurance claims if they are injured on the job and receive workers' compensation. This could cost the owner a large sum through higher insurance premiums or put the policy at risk. The payroll services we provide greatly lighten the company owner's liability load by taking over IRS and compliance responsibility as the workers' Employer of Record, and by handling the workers' compensation responsibilities. This effectively isolates the temporary and independent workers from the staff labor. So, if there is an injury among the temporary or independent workers, the insurance claim is spread over $1 billion worth of payroll, whereas the production company could be affected negatively if the workers' compensation claim was handled under their own insurance, resulting in higher premiums or a policy cancellation."

According to the company, payroll services aren't free, and using one will likely cause labor costs to rise, but the decision to utilize a payroll service is an alternative choice, in light of the exposure a company could face if they are audited by the IRS. The company suggests owners can do one of two things: Operate according to the new, changing regulations and comply with the tax classification requirements in order to steer clear of any problems, or they can skirt the issue and potentially wait for the taxman to inevitably come calling. By converting independent contractors to temporary employees, companies can eliminate long-term liability while lowering short-term liability costs.

The film and television production industries rely heavily on temporary labor and many utilize payroll services. The company says this allows them to protect themselves from unforeseen costs and tax burdens and avoid blemishing their own insurance policies at the same time.