Independent Contractors: Financial Trap for Employers?

Most employers are now aware of the fact that the PPACA’s “play or pay” provisions will soon be implemented. These provisions require large employers to provide full-time employees with health insurance. Some employers may hope to reclassify employees as independent contractors to circumvent the requirements of the PPACA.  Prudent employers, however, will err on the side of caution in classifying workers as independent contractors.

The financial consequences of an employer that erroneously classifies employees as independent contractors can be significant. For example, assume Acme Corporation has 30 full-time employees and 70 independent contractors. The IRS audits Acme Corporation and finds that all 70 independent contractors were erroneously classified and are actually full-time employees.  Assuming that one full-time employee obtained a subsidy through the new health insurance exchanges, Acme Corporation would owe a shared responsibility penalty of $140,000 with respect to the 2014 plan year.

As part of an effort to generate revenue, audits of employers on employment issues have been increasing.  Before the implementation of the PPACA, the IRS was already ramping up its independent contractor audit activity and looking closely at the issue of whether workers have been properly classified as employees or independent contractors. The implementation of the PPACA’s “play or pay” provisions will only increase the IRS’s incentive to find employers that have misclassified employees as independent contractors. Further, there is always the threat that a worker classified as an independent contractor will seek out IRS review of the classification because of the worker’s desire to receive health coverage and other benefits.  Given the heightened scrutiny by the IRS and the potential penalties, employers should exercise caution before reclassifying workers as independent contractors.

About Bose McKinney & Evans LLP

Bose McKinney & Evans LLP is a business law firm, headquartered in Indianapolis, Indiana, serving both publicly held and privately held businesses, governmental entities and high-growth industries. Our clients include Fortune 100 companies, international manufacturers, national and regional financial institutions, agribusinesses, sports teams, university-incubated start-ups, media, utilities, cities and schools, to name a few. We strive to build strong relationships with our clients as key business advisors, to exceed expectations in the quality of our work, to be knowledgeable about our clients’ businesses and sectors, to be responsive to service needs and to continually seek to improve the delivery of client services. Our ultimate focus is on our clients.
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