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Correctly Classifying Employees to Avoid ACA Penalties

1_employees-slide-1Beginning in 2015, applicable large employers that do not offer affordable minimum value health coverage to their full time employees will be subject to the employer shared responsibility penalty under the Internal Revenue Code. This applies to large employers, with 50 or more full-time employees. But what exactly constitutes a full-time employee? It sounds like an obvious thing, but it can get exceedingly murky when you have contract workers. Going forward, employers will need to be careful and make sure they are classifying their workers properly.

Many employers have workers who perform services under individual or third party contracts and are known as contract workers, temporaries, independent contractors or consultants. Classifying employees properly can be a problem, especially when the IRS disagrees with an employer’s classification. An employee is defined by the IRS as a “common law employee” meaning that the relationship exists “when the person [entity] for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished.” (1) The IRS considers many factors when deciding whether an employee meets their “common law employee” definition. Among other things, they look at whether the employer can hire or fire the worker and whether or not the employer provides tools and equipment to the worker.

Individuals employed by a staffing agency but working under the direction and control of another employer are the common law employee of the entity for whom they perform the work. Therefore, using a staffing firm to hire workers will not reduce the number of employees an employer has.

For those employers that have misclassified workers as independent contractors but should have classified them as employees, the IRS has the Voluntary Worker Classification Settlement Program which enables those employers to reclassify workers from prior years for a fraction of the cost (in penalties) that otherwise could be incurred. To be eligible for worker reclassification, a taxpayer must have consistently treated the workers as independent contractors or other nonemployees, including having filed all required Forms 1099 for the workers to be reclassified for the previous three years. The employer also cannot be undergoing an audit by the IRS, the Department of Labor, or a state agency concerning the classification of these workers.(2)

Additional Reading:
-IRS issues final ACA employer shared responsibility regulations: Employers that misclassify workers may face significant exposure

-How to classify temporary employees under the ACA



(1) Affordable Care Act Employer Penalties- Another Reason to Make Sure Workers are Properly Classified as Employees or Independent Contractors by Monique Warren
(2) Voluntary Classification Settlement Program

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Posted in Affordable Care Act (ACA), Compliance & Taxes, Human Resources | Comments Off on Correctly Classifying Employees to Avoid ACA Penalties

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