The Employee Retention Tax Credit (ERTC) aimed to support businesses affected by the COVID-19 pandemic. Eligible employers can claim a percentage of qualified wages for every employee, helping them continue operations.

Unfortunately, some businesses may run into complications when applying. If you’ve misclassified workers as independent contractors, you may be unable to claim your full credit.

You can, however, correct misclassified employee ERTC claims. Dayes Law Firm explains how worker classifications work, how to adjust a worker’s classification retroactively, and what you can do to avoid problems in the future.

Types of Worker Classifications

Broadly speaking, there are two types of worker classifications:

  • Employees: These workers have a job controlled by the payer. They operate under set hours, have to pay certain taxes (such as social security and Medicare taxes) from their paychecks, and have a set income. In addition, an employer may offer benefits (such as health insurance), vacation days, and sick days.
  • Independent Contractors: Businesses don’t directly employ independent contractors. They set their own hours, use their own equipment, and submit invoices to request payment.

Misclassifying workers as independent contractors is a common error. Some businesses may do so intentionally to avoid paying certain taxes; others, however, may simply not understand the distinction between the two worker classifications.

In addition, some situations can be complicated. For example, say a company hires an independent contractor, but they want them to work during specific times. Because the employer sets the hours, the worker might legally need to be considered an employee, not an independent contractor.

Unfortunately, misclassifying workers can come with potential penalties — for example, fines or lawsuits. Regarding the ERTC, employers might be unable to pursue their maximum benefits if they misclassify employees.

What Should You Do If You Classified Workers Incorrectly?

Misclassified employee ERTC claims can come with significant drawbacks. Thankfully, there are ways to address the issue.

Employers may be able to submit amended employment tax returns and wage statements to the Internal Revenue Service (IRS) to reclassify independent contractors as employees. Note that you will likely need to pay additional employment taxes, so be sure to factor that into your finances.

In addition, eligible employers may be able to take advantage of the Voluntary Classification Settlement Program (VCSP). This program allows you to reclassify workers while only paying 10% of the employment taxes you’d normally owe for them.

Regardless of the situation, it’s important to be open and transparent. Work closely with local tax authorities and any affected employees to ensure the process goes smoothly.

How to Avoid Misclassification in the Future

While correcting misclassifications is important, you’d likely prefer to avoid them in the first place. Make sure to train team members — especially HR professionals and hiring managers — to help them understand the distinction between worker classifications. In addition, stay up to date on current laws and regulations and conduct regular audits to ensure you classify employees correctly.

Partner With Dayes Law Firm for Assistance With the ERTC

Employee misclassification can lead to a decreased tax credit. You can correct misclassified employee ERTC claims, but it may involve adjusting tax forms or other complicated legal procedures. Consider working with a lawyer. An attorney can guide you through the reclassification process to take the stress off your shoulders.

At Dayes Law Firm, we have a thorough understanding of how the ERTC works. We can help clients learn how to reclassify employees and guide them through the claims process from start to finish. Call 866-875-1005 if you’d like to learn more.