The IRS, through its Questionable Employment Tax Practices initiative, is successfully working with states on worker misclassification issues. However, according to a recent report from the Government Accountability Office (GAO), one agency with which the IRS doesn’t work well is the U.S. Department of Labor’s Wage and Hour Division (WHD).
That’s despite the fact that both agencies have a vested interest in ensuring that workers are properly classified as either employees or independent contractors.
In response to the GAO’s critique, the agencies have pledged greater cooperation.
A failure to communicate
There are systemic reasons why the WHD and the IRS don’t see eye-to-eye, the GAO said.
First, each agency defines “employee” differently. The IRS uses concepts of behavioral control, financial control and the relationship between the employer and the worker to determine the worker’s status. For minimum wage and overtime purposes, the WHD uses a six-factor test based on the worker’s dependence for a living on the employer.
Second, the IRS must keep tax data confidential, which prohibits a great deal of information sharing.
Handshakes all around
As a result of the GAO’s investigation, the WHD and the IRS will address worker misclassification by:
- Establishing an interagency initiative with other federal and state agencies. Since tax data may provide useful leads on noncompliant employers, the task force will determine to what extent tax information would be helpful, and seek a legislative change that would allow the IRS to share more data.
- Collaborating on education and outreach to workers on the classification rules and related tax obligations.
Fear the WHD auditors
Employers that misclassify workers for tax purposes don’t have to put them on the payroll if they qualify for relief under Section 530 of the Revenue Act of 1978. That is, they provide those workers with Forms 1099-MISC, and they have a reasonable basis for the original, but wrong, classification. The WHD, however, has one power the IRS doesn’t possess: It may require misclassified workers to be put on the payroll for minimum wage and overtime purposes.