By Tom Breedlove of Breedlove & Associates
The Department of Labor (DOL) and the IRS have recently announced that they are collaborating to more aggressively enforce worker classification laws, which costs the federal and state governments billions in lost tax revenue each year. Listed as one of the primary enforcement targets: the household employment industry.
What does that mean to you? If your family gives you a Form W-2 at the end of the year, that means you’re being classified correctly as an employee. You and your employer have no worries. If your family gives you a Form 1099, that means they’ve misclassified you as an independent contractor.
If you get a 1099 from your employer, you should know two things: 1) independent contractors have a higher tax burden than employees – with fewer benefits/protections; and 2) your family is breaking the law and may find themselves facing tax evasion charges.
The reason independent contractors pay more in taxes is because they have to pay both the employee AND employer portion of the FICA taxes (Social Security & Medicare). Employees, on the other hand, are only required to pay the employee portion of FICA. The difference between the tax rates is significant – 7.65%. As an example, at $30,000 per year in compensation, an independent contractor will pay an additional $2,300 per year in taxes!
Additionally, independent contractors are not entitled to unemployment benefits.
The Bottom Line: You and your family both have a lot to lose if you’re being misclassified – and the chance of getting caught is much greater now than it’s ever been. If you have any questions about worker classification, please don’t hesitate to call us at 888-BREEDLOVE (273-3356). It’s a free call and we’re always happy to help.