Colorado Department of Labor Audit on Worker Classification

When an individual or business provides services to another business, they must be classified as an employee or independent contractor.  The Colorado Department of Labor does conduct audits to determine whether a business is properly classifying their workers.  This article has been prepared by a Denver tax attorney to provide additional information regarding an audit by the CO DOL.

If you’re concerned about an Colorado Department of Labor audit of your business, get in touch with the McGuire Law Firm about what you can do to protect your business.

 

Who Does the Colorado Department of Labor Audit?

The Colorado Department of Labor can audit any business paying contractors to determine if the classification of the third-party as a contractor is correct.  

 

What is the Audit Process with the Colorado Department of Labor?

First, the business will receive a notice that they are being audited for the classification of their workers.  The audit notice will provide the examiner or auditor’s name and contact information as well as a request for documents.  After producing the requested documents, the examiner may have questions or they may provide their findings.  The findings will outline which third parties they believe should have been classified as an employee and the tax or penalty for failing to properly classify the parties.  You have the right to appeal the findings of the examiner and state your case to an appeals officer.

 

What Documents Are Requested by the CO DOL?

The examiner will generally request all of your business records relating to the payroll such as W-2s, W-3, 941s, payroll ledgers or summaries and related information.  Further, the examiner will request your income statement, copies of 1099s and any contractor files such as your independent contractor agreements with the contractors.

 

What is the CO DOL Focusing on in a Classification Audit?

The focus is primarily on whether or not the parties that received 1099s or payments for services were properly classified as independent contractors.  Thus, although the payroll information is important, the list of parties your business issued 1099s to or paid as a contractor are likely to be the primary focus.  The DOL examiner will use the 1099s and expense ledger to then have a list of all parties paid who could possibly be reclassified as an employee.

 

How Are Parties Chosen for Audit by the CO DOL?

Some audits can be random, while others may have been selected given the amounts paid to third parties as contractors in comparison to employees.  Further, we are told many audits begin when a third-party claims unemployment as an employee but are told they have been treated as a contractor and may not be eligible for unemployment benefits.  When the individual claims they are an employee, the DOL may determine they should investigate further as to the business paying this third party.

 

What Are the Penalties for Improperly Classifying Workers?

The penalties can be severe.  A first time willful violation can be a $5,000 penalty per offense with a $10,000 penalty of the classification is not corrected within 60 days of the DOL finding the offense.  Further, the DOL can penalize a business $25,000 for a second or later willful violation and up to $50,000 for repeat violations.

 

Why Does the CO DOL Care About My Worker Classification?

The DOL cares because a business does not pay unemployment insurance for independent contractors.  Thus, the unemployment insurance fund can be reduced or weakened when an employee does not properly classify their workers as employees.  Further, the individuals seeking unemployment are harmed when they do not qualify for unemployment.

 

What Other Tax Ramifications Exist?

If the DOL reclassifies third-parties as employees and you begin paying these employees wages, the wages would then be subject to social security and Medicare tax.  The total social security and Medicare tax is 15.3% with half (7.65%) being withheld from an employee’s paycheck (the employee portion) and the other half being paid by the employer (the employer matching portion).  The employer matching portion is why many businesses would prefer to classify workers as contractors because they do not have to pay the 7.65% matching amount.

 

What to do if You Have Received Notice of Audit

If you have received a notice of audit from the DOL, please consider speaking with a Denver tax attorney at The McGuire Law Firm.  A tax attorney can represent you and assist you through the audit as well as assist with properly drafting contractor agreements and classifying workers in the future.  Contact us for a free consultation.