Businesses that use independent contractors (ICs) take note: The IRS is launching a program to examine 6000 randomly chosen businesses over the next three years to see if they have correctly classified workers as ICs or employees. The federal government expects to raise $7 billion over the next 10 years through tougher enforcement.

In addition, the U.S. Congress has indicated it will consider legislation that may effectively restrict the types of workers that may properly be classified as independent contractors. And many state governments are jumping in as well, taking a more aggressive role in identifying and enforcing cases of misclassified workers.

The bottom line here is that if you use ICs, make sure they are classified properly.

Since hiring ICs is generally easier and cheaper than hiring employees (for starters, employers don’t owe payroll, unemployment, or worker’s compensation taxes with ICs), it can be tempting for a business to classify a worker as an IC even if the worker fits the definition of an employee. It’s easy to flout the rules since there’s no definitive test to distinguish these two types of worker. But while there’s no single bright-line test, there are plenty of criteria the IRS use to determine whether a worker is an employee or an IC—and these criteria are nothing to trifle with! Ignoring the rules can result in hefty penalties and back taxes (not uncommonly in the tens or hundreds of thousands of dollars). So if you currently use ICs, do yourself a favor and make sure your classifications are correct.

For the skinny on the criteria for ICs versus employees, see Nolo’s free article, Independent Contractor or Employee: How Government Agencies Make the Call.

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