Marketing Insurance Surveys Small Biz. Starting Out Sales Mgt. The question of whether to classify workers as independent contractors or employees continues to haunt most small-business owners. The IRS also says that, besides the employment tax loss, many of these misclassified workers aren't paying income taxes. The agency's statistics show that when the business fails to file with the IRS, less than 30 percent of the workers report their compensation.
Businesses have good reasons for misclassifying.
Because there is no clear definition between classifications, and tests distinguishing the status of each are complicated and subjective. Aside from that, organizations have a strong incentive to opt for independent-contractor classification. With independent contractors, companies need not keep track of withheld income taxes, which can be difficult in high employee-turnover industries, nor do they have to pay hefty Social Security taxes. Additionally, some workers refuse to allow anyone to report their names and compensation to the government. Classifying may seem simple.