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Frequently Asked Questions (FAQs)
About Iowa Worker Misclassification

1. What is misclassification of workers?
Misclassification happens when an employer incorrectly classifies workers as independent contractors instead of employees.

2. Why is it important to correctly classify workers?
An employer has different legal, tax and financial obligations depending on how a worker is classified. If you are an employee, the employer must:

  • withhold income, F.I.C.A. (Social Security) and Medicare taxes from the employee’s wages;

  • pay F.I.C.A. (Social Security) and Medicare taxes in addition to the employee’s share;

  • pay unemployment taxes (which provides insurance coverage if the worker is laid off);

  • buy workers’ compensation insurance (which provides insurance coverage if the worker is injured on the job); and

  • comply with state and federal wage and overtime laws, contractor registration requirements, and other employment, labor, and employee benefit laws.

If you are an independent contractor, the employer generally does not have the duties listed above. The worker must:

  • make quarterly estimated payments for income taxes, and

  • pay self-employment taxes.

An independent contractor cannot get unemployment compensation. In many cases, the worker will not get workers’ compensation if injured on the job.

3. What difference does it make to workers, businesses and taxpayers if workers are misclassified?

  • The consequences for misclassified workers include:

  • Workers are denied unemployment insurance benefits if laid off.

  • Workers are denied workers’ compensation coverage if hurt on the job.

  • Workers lose other employment and labor law protections, such as minimum wage, overtime, health and safety, and family and medical leave.

  • Workers pay full Social Security taxes and report their own income taxes.

  • If workers are paid in cash, no one pays FICA/Social Security taxes. The worker may get less in Social Security benefits at retirement.

  • Workers lose access to employer-based benefits, such as health insurance.

  • The consequences for employers that misclassify workers include: 

  • Employers fail to pay withholding taxes, FICA taxes, unemployment taxes and workers’ compensation premiums. They may face penalties.

  • Employers jeopardize a fair and competitive marketplace by underbidding honest, law-abiding businesses that include all required taxes and benefits in their overhead.

  • Employers may be required to pay employees unpaid income taxes.

  • Employers that don’t pay unemployment taxes could result in higher taxes for all other employers.

  • The consequences for government and taxpayers include:

  • Government collects less unemployment taxes to pay unemployment insurance benefits.

  • Government collects less income and FICA taxes.

  • Taxpayers bear costs avoided by others. The costs do not go away.

4. Is misclassifying an employee illegal?
Yes. Intentionally misclassifying workers is illegal and constitutes tax and insurance evasion.

5. Could an employer face penalties if workers are misclassified?
Yes. Employers that misclassify may face:

  • penalties and fines,

  • interest on back taxes and

  • criminal charges under various laws.

6. What laws impact misclassification?
The laws include:

  • Unemployment Taxes: Iowa Code Chapter 96

  • Income Taxes: Iowa Code Chapter 422

  • Workers’ Compensation: Iowa Code Chapters 85-87

  • Iowa’s Minimum Wage: Iowa Code Chapter 91D

  • Iowa’s Wage Payment Collection Law: Iowa Code Chapter 91A

  • Contractor Registration: Iowa Code Chapter 91C

  • Federal Overtime Law: U.S. Code, Title 29, Section 207

  • Federal Minimum Wage Law: U.S. Code, Title 29, Section 206

7. Who is an “employee” under Iowa law?
An employee is anyone performing services for an employer. The employer controls the work to be done and how it will be done.

8. Who is an “independent contractor?”
“Independent contractors” are in business for themselves. They are not employees. They have an independent trade, business or profession they offer to the public. They are generally hired to accomplish a task(s) determined by the employer. Independent contractors retain the right to control how they will do the work.

9. What if I have a contract that says I am an independent contractor?
A written contract that creates an independent contract relationship is worthless if the employer retains the right to control what will be done and how it will be done.

Generally, an employer-employee relationship exists when the:

  • work is an integral part of the employer’s regular business and

  • worker does not give an independent business or professional service to the employer.

10. What does it mean if I get a 1099 form at the end of the year?
A 1099 form reports an independent contractor’s income. This usually means that the employer did not withhold federal or state income taxes, or FICA (Social Security) or Medicare taxes from the worker’s pay during the year.

The 1099 form is the right form to use if the worker really is an independent contractor. It is the wrong form to use if the worker really is an employee.

Employees should get a W-2 form at the end of the year. The W-2 form includes total wages and the amount of federal and state income taxes withheld. If you get a 1099 when you should have a W-2, you might owe federal taxes. 

11. Who determines if a worker is an employee or an independent contractor?
Iowa Workforce Development and the Iowa Department of Revenue have Investigators and auditors who determine worker classification by employers. If you have questions, you may contact the Misclassification Unit IWD. Click here for contact information. You also may contact the Department of Revenue’s Taxpayer Services at (515) 281-3114, or via the web site: http://www.iowa.gov/tax/

12. How do state investigators and auditors determine if a worker is an “employee” or an “independent contractor?”
The facts in each case are different. Several factors are considered.

  • The right to control the work to be done and how it will be done, whether or not used, is an important factor. The right to discharge a worker at will and without cause is strong evidence of the right of direction and control. 

Other factors include:

  • How much does the employer actually control the way the services are performed?

  • Does the person performing the services have a separate, established occupation or business?

  • Is the work usually performed without supervision?

  • What skill is needed to perform the services and accomplish the desired result?

  • Who supplies the tools, equipment, and place of work for the person doing the work?

  • Is performance of services an isolated or continuous event?

  • How is the worker paid? Is it by time (hourly or weekly), a piece rate, or by the job?

  • Is the work part of the regular business of the employer?

  • Are the services performed for the employer as an individual or for the employer’s business?

  • Can the worker make business decisions that result in a financial profit or loss for the worker? The worker's investment of time is not enough to show a risk of loss.

  • Is the worker required to perform the service personally? Can the worker hire assistants? If the worker hires substitutes or helpers, is approval required? Who pays the substitutes or helpers? Is the worker reimbursed if the worker pays the substitutes or helpers?

  • Does the customer pay the worker or the business?

  • What type of advertising does the worker do (e.g. business listing in a directory, business cards, etc.)?

13. How can I report employment misclassification?
You can report suspected misclassification to the Misclassification Unit at Iowa Workforce Development. Click here to report misclassification.
 

Iowa Misclassification Home Page

 

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