Below is a factual accounting from an established business owner that was audited for misclassifying.
“I started my dog walking business in early 2012. In response to consistent growth, I needed to add dog walkers by the end of the calendar year. Without doing much research, I quickly decided to “hire” my first dog walkers as independent contractors. This seemed to be the logical solution: it was commonplace amongst peers, quick & easy to complete (minimal paperwork), and most importantly, it was cost-effective for a new business owner.
Fast-forward to fall 2015 – I have 8 people on my team, all classified as independent contractors. One of them resigned (on good terms) due to an upcoming move to the east coast, and in the meantime, decided to file for unemployment benefits. As business owners, we all know ICs cannot receive unemployment benefits, but this obviously does not prevent them from trying (filing). Unsurprisingly, her attempt was denied since she resigned, but shortly thereafter, the Illinois Department of Employment Security (IDES) sent me a letter with a lengthy questionnaire about my business operations. After returning the questionnaire, I received a follow-up phone call from IDES essentially confirming my answers were correct & truthful.
Within a couple of weeks, I received the bad news: my business was chosen to be audited by IDES. The in-person meeting was scheduled at IDES’ downtown office and I was required to bring along 3 years of worker pay records, tax returns, complete financial reports, and city license certificates. The auditor went through my papers for several hours and asked for clarification on multiple occasions. He then left the room for thirty minutes or so. He returned with the IDES final determination and rundown of next steps for me and my business.
In summary, IDES determined my dog walkers were/are treated as employees and therefore considered misclassified. Fortunately, my auditor reported the misclassification of workers as non-malicious & unintentional. Had he felt I knew the law and purposefully misclassified my staff, there would have been significant fines attached…and potentially losing the right-to-do business in the State of Illinois. Despite the sliver of good news, the determination still required me to pay all unemployment insurance contribution tax for 3 years plus interest. For new businesses in Illinois, this rate is approximately 4% of all workers’ pay. The interest rate is 2% per month (24% per year), which goes back as much as 3 years for some of the unpaid taxes. Finally, I had 30 days to reclassify my workers as employees by filing the necessary paperwork, setting up the unemployment insurance account with IDES, setting up the state & federal tax accounts for payroll taxes, and getting workers comp, etc.”
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