May 2010

Classify carefully | Focus

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Classify carefully

by Ambika Puniani Bailey
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It's not uncommon for roofing contractors to hire independent contractors to perform roofing work. Hiring independent contractors can save employers money—employers don't have to pay unemployment insurance, workers' compensation insurance or payroll taxes for independent contractors. However, if you rely on independent contractors, brace yourself for a potential audit by the Internal Revenue Service (IRS).

In February, the agency announced a plan that includes randomly examining 6,000 companies during the next three years for employee misclassifications. The IRS anticipates levying up to $7 billion in fines during the next 10 years for employee misclassifications.

Gene Zaino, president and chief executive officer of Herndon, Va.-based MBO Partners, which specializes in the independent contractor market, told "Most states are now sharing data with the IRS. … It used to be that if a business ran into trouble with a state labor department or with the IRS, the issue was isolated. Now, any kind of audit or compliance finding can set off a domino effect where the other agencies will get in on the action."

And the fines can be large. According to, Illinois fined Chicago-based construction company Mega Builders $328,500 in December 2009 because the company had misclassified 18 employees as...

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