Remember that kids’ game, Animal, Vegetable, or Mineral? You had to guess into what category the object fell. Well, today in business, there is a similar question. Independent contractor or employee?

But it’s not a game. The misclassification of a worker can have serious financial consequences. Penalties and interest involving payroll taxes can pile up if someone is incorrectly treated as an independent contractor. And in the case of a retirement plan, the employer would have to make up the benefits the individual would have received.

It’s an issue that we are particularly sensitive to with our clients at this time of year as we start to receive employee census data for 401(k) discrimination testing. One of the questions we ask is "Do you have any independent contractors?" A "yes" response initiates a discussion that the employer have a process in place that the independent contractor classification will hold up in the event of an audit.

Rush Nigut, a West Des Moines, Iowa-based attorney also has an on-going concern about the classification issue and has written about the subject. His recent post on his blog, Rush on Business, State of Iowa to Step Up Contractor Misclassification Efforts, also include links to other information on the matter. It is anticipated, Rush said, that these enforcement efforts could bring in millions in additional revenues to the state.

But it’s not just the State of Iowa or other states for that matter, the Internal Revenue Service, of course, also has a keen interest in proper classification of workers. Just last month, the IRS updated their on-line resource page, Independent Contractor (Self-Employed) or Employee? The page includes links to how to get a determination from the IRS on a worker’s status and how to get tax relief.

And for any complicated tax matter like this one that can be a potentially costly tax miscue, consult a qualified tax advisor. This is another one of those "kids, don’t try this at home" matters.

Picture credit: Animal, Vegetable, or Mineral?, by Michael Cook. Installation: each unit 4ft., x 4ft., overall dimensions 8ft. 6in. x 8ft. 6in. for each group of four, Museum of Fine Arts, Santa Fe, 1990.