As the Obama administration continues to crackdown on the misclassification of W-2 employees as 1099 Independent Contractors, the Affordable Care Act (ACA, also known as Obamacare) is upping the ante on worker misclassification penalties.
Employers are often tempted to classify workers as Independent Contractors because they don’t have to pay the employer share of taxes or provide benefits to those workers. Obamacare’s upcoming employer mandate makes this type of arrangement even more tempting. Under the employer mandate, which will go into effect in 2015, employers with 50 or more full-time or full-time equivalent employees will have to provide healthcare insurance to at least 95% of their full-time workforce or face fines. Even if they provide coverage, they could be fined if that coverage does not meet the ACA’s standards.
Converting employees to Independent Contractors is one way employers are looking to skirt the mandate because Independent Contractors don’t count toward the 50-employee threshold. But workers must meet the IRS guidelines to be legally classified as Independent Contractors. The government is onto this ploy and will be scrutinizing worker classifications even more closely. One of the biggest red flags that alerts the IRS to misclassified workers is when a worker who was paid on a W-2 is now paid on a 1099. In addition to the typical back pay and penalties employers face, Obamacare fines can also be assessed once the employer mandate is enacted in 2015.
If an IRS audit reveals that an employer misclassified workers and reclassifying those workers as W-2 employees puts the employer over the 50-employee threshold, they could be subject to the fine for failing to offer healthcare coverage. That fine is $2,000 per full-time employee if even one employee obtains insurance through The Marketplace with government subsidies. If they do offer coverage, but that coverage doesn’t meet the ACA’s standards for minimum coverage and affordability, the employer could pay $3,000 for each employee who goes to The Marketplace for coverage and obtains a government subsidy.
While 2015 may seem like a long way off, employers need to start preparing for the employer mandate now and determine their strategy. If independent contractors are part of your clients’ plans, you may want to warn them about the financial and legal risks. You can also provide a safer alternative – convert a portion of their workforce to contractors who are W-2 employees of a contract staffing back-office. That way, the back-office is responsible for ACA compliance, not your client. Just be sure to align yourself with a back-office that is ACA-compliant.