Proper classification of workers is important to state agencies, employers and individuals. Businesses and workers are the ones most impacted by misclassification and the Oregon Legislature has enacted strict penalties to combat this. For businesses, worker misclassification contributes to:
• Underfunded worker benefits such as medical, vision, and dental plans.
• Tax avoidance; non-compliant businesses do not pay unemployment insurance tax, workers' compensation, and other taxes based on employment.
• Unfair wage practices including paying workers less than minimum wage or “under the table” cash payments.
• Putting businesses and individuals that obey the law at a disadvantage; Businesses that follow the law cannot effectively compete with non-compliant businesses that unlawfully have a lower overhead and cost for their business.
• Increased taxes for all compliant businesses; The Unemployment Insurance Trust Fund is self-correcting, maintaining a set threshold. If enough businesses do not make the appropriate contributions in the form of taxes, tax rates can increase in order for the trust fund to maintain its funding.
Misclassification can also have long-term effects on a business’s overhead. Agencies involved in classification and compliance have a variety of penalties that can be applied ranging from financial penalties and interest, to suspension of licenses, to civil penalties and jail time.
Tax assessments can also increase for a business that misclassifies workers.
Federal Insurance Contributions Act (FICA) Tax is comprised from two taxes: Social Security and Medicare. This tax is based on the amount of wages paid to employees and can increase depending on the amount of wages paid.
Unemployment Insurance tax funds the program that pays benefits to people out of work through no fault of their own. Like FICA, Unemployment Insurance tax is based on the amount of wages paid to an individual each quarter. If a worker is misclassified as an independent contractor and is later found to be an employee, the taxes on that person’s wages will be assessed.
Many businesses will classify their worker’s as independent contractors in order to simplify and reduce their payroll taxes, including withholding. If the Department of Revenue (DOR) finds that an employer has misclassified employees as independent contractors, we will use the best available information to contact the business owner and gather correct payroll tax returns. In cases of non-compliance, DOR may use the best available information to assess payroll taxes for the business. In cases where DOR must assess payroll tax for the employer, penalties are incurred as well. Depending on the number of quarters that have not been filed, DOR may assess up to 100% penalty on accounts where the employer has failed to file. DOR may also determine which individuals are personally responsible for income tax withholding and pursue those individuals for the full balance due.