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Excise tax implemented on employers misclassifying workersPosted on December-08-2011 by admin
Beginning 2014, a new excise tax is being implemented to encourage employers to provide health care to their employees. This is related to the 2010 Affordable Care Act which set up regulated insurance exchanges where individuals and small businesses may purchase health coverage.
The excise tax was created in hopes of having employers realize providing health care coverage to their employees would be more cost-effective than paying these excise taxes. Now more than ever employers need to be careful as to how they’re classifying workers between employees and independent contractors, which can have a significant effect on the amount of excise taxes being paid by the employer, especially those expecting relief from Section 530.
Section 530 was created to protect small businesses from employment tax liabilities resulting from innocently misclassifying employees as independent contractors. If the requirements under Section 530 are met, an employer that improperly treated an employee as an independent contractor would not be liable for employment taxes associated with that independent contractor and could continue to treat that individual as an independent contractor going forward.
Whether a worker should be classified as an employee or an independent contractor depends on the following: 1) behavioral control-the right to direct or control the details of the services required, 2) financial control-the right of business to direct or control the economic aspects of the workers activities, and 3) the relationship of the parties and how they perceive their business relationship. Since there aren’t distinct differences it may be difficult to determine the proper classification.
Coming in 2014, even if a single employee is misclassified as an independent contractor, this poses the risk of a penalty for not providing health insurance to the entire work force being applied. The excise tax applies to large employers that do not offer health care coverage to its employees, while a full-time employee is receiving subsidized health insurance on an insurance exchange. In such cases the employer would be subject to a monthly penalty equal to the number of full-time employees minus 30, times 1/12 of $2,000. In relation to excise taxes, large employers are those considered to have at least 50 full-time employees (employees with an average of 30 hours per week) or full-time equivalent employees. Thus if an employer has an employee that is improperly classified as an independent contractor that is receiving health insurance on an exchange, the employer runs the risk of having a substantial penalty assessed against them.
Currently an employer may be treating an employee as an independent contractor but relies upon Section 530 relief to continue treating the employee as an independent contractor for employment tax purposes, but may not be able to rely upon Section 530 relief to treat that employee as an independent contractor for purposes of the health excise tax on large employers. Therefore, employers will be looking for additional guidance and consistency on the interaction of Section 530 relief with the health excise tax for large employers for improperly classified employees. Without the guidance, the IRS may be looking more in-depth as to how employers are classifying workers between employees and independent contractors and whether or not health care coverage is being provided or if health insurance is being received by workers through exchanges. Employers should pay close attention to their classifications within the next couple of years in preparation of the January 1, 2014effective date of the possible excise tax on large employers. Especially considering an employee misclassification could lead to significant excise taxes, especially those employers relying relief from Section 530 of the Revenue Act of 1978.