Your “contractor” could cost you years of pension contributions 💀

Hi,

Most worker classification advice is written for private businesses, and it stops at the IRS. For a government employer, the IRS is not the expensive part.

If someone you paid as a contractor is later determined to have been an employee, you are not just looking at back payroll taxes and penalties. You are looking at your public retirement system, which can assess the employer and employee contributions that should have been remitted for every year that person worked.

Those systems have long memories, statutory collection authority, and no particular interest in whether the arrangement seemed reasonable at the time. The bill arrives as one number, years deep, and it lands on a budget that was balanced without it.

Governments accumulate this exposure in ways private employers never do:

• The retired employee brought back part time. Familiar, capable, invoices monthly. Often still doing the same job, at the same desk, with the same email address.
• Stipend positions. Board secretary, zoning clerk, deputy registrar, assistant coach. Paid a flat annual amount and treated as outside payroll because the amount is small.
• Volunteer firefighters and EMS receiving per-call payments or annual stipends. A genuinely nominal fee can preserve volunteer status. Once it starts to look like compensation for hours worked, it stops being nominal, and the analysis changes.
• Election workers, who sit under their own special rules and thresholds, and who get missed every single cycle.
• Elected and appointed officials, who are generally employees for payroll purposes no matter how the role is described in the charter.
• The long-term “consultant” who has been on a renewed annual agreement for nine years, works your hours, uses your equipment, and has no other clients.

There is a second layer that exists only in the public sector. Social Security coverage for your employees may be governed by a Section 218 agreement between your state and the Social Security Administration, and what that agreement covers determines who owes what. Entities routinely operate for decades without anyone on staff having read theirs. When a classification question surfaces, that document decides the answer, and finding out what it says during an assessment is the worst possible time.

The cost of getting it wrong compounds in three directions at once:

• Retirement system arrears, employer and employee share, plus interest, often for multiple years
• Payroll tax assessments and penalties, which are the smallest piece and the one everybody focuses on
• Overtime exposure, because a misclassified worker who consistently exceeded forty hours has a wage claim, and wage claims in the public sector become news

The fix is not complicated, it is just never anyone’s priority until it is urgent. List out everyone your entity pays who is not on payroll. For each, ask who controls how and when the work is done, whether the arrangement has an end, and whether the person serves anyone else. Read your Section 218 agreement and know which classes of employee it covers. Document the analysis for each position, so the answer exists in writing before anyone asks for it.

This is work we handle directly:

• Worker classification review for contractors, stipend positions, volunteers and officials
• Full-service payroll for public entities, including multi-jurisdiction withholding and retirement system reporting
• W-2 and 1099 filing, and correction of prior year filings where a reclassification is required
• Voluntary correction and disclosure strategy where exposure is already there
• Audit and Single Audit engagements, ACFR and AFR preparation, and fund accounting bookkeeping

Reply to this email by Friday and we will set up a free 15-minute call with one of our senior government specialists. Send us a list of everyone you pay on a 1099 or by stipend, and we will tell you on the call which ones are most likely to be reclassified, and what that would cost if your retirement system gets there first.

Sincerely,

—

George Dimov, CPA

Licensed and Insured

(833) 829-1120 toll free

(212) 994-8081 Fax

www.dimovtax.com