ACA penalties due to Employee Misclassification

A gavel and penalty symbol

Hello again,

This post is for any company that wants to avoid Affordable Care Act Penalties.  If your business employs independent contractors, we hope you will find this post useful. This post is sourced from the ACA Times.


Independent Contractors are not counted when determining if a company is an ALE.  However misclassification can result in possible penalties. For example, if a company with 40 FTEs mistakenly classifies 10 independent contractors, who should be categorized as full time, the business is considered an ALE.

If the ALE doesn’t offer required coverage and file 1094/1095s, they can be penalized. Penalties are $260 per form, and penalties double for intentional failure to file. Failure to offer required coverage to at least 95% of the 50 workers could result in penalties of around $2,000 per employee.

The IRS provides guidelines for categorizing independent contractors, but there is sometimes a grey area in determining status, so it is important to read all the guidelines and consult with your accountant.  Once you have determined categorization, Passport Software’s ACA Compliance software can help track ACA compliance year-round.

Independent Contractors

The following is from IRS Topic 762 – Independent Contractor vs. Employee:

For federal employment tax purposes, the usual common law rules are applicable to determine if a worker is an independent contractor or an employee. Under the common law, you must examine the relationship between the worker and the business. You should consider all evidence of the degree of control and independence in this relationship. The facts that provide this evidence fall into three categories –Behavioral Control, Financial Control, and Relationship of the Parties.

Behavioral Control covers facts that show if the business has a right to direct and control what work is accomplished and how the work is done, through instructions, training, or other means.

Financial Control covers facts that show if the business has a right to direct or control the financial and business aspects of the worker’s job. This includes:

·         The extent to which the worker has unreimbursed business expenses

·         The extent of the worker’s investment in the facilities or tools used in performing services

·         The extent to which the worker makes his or her services available to the relevant market

·         How the business pays the worker, and

·         The extent to which the worker can realize a profit or incur a loss

Relationship of the Parties covers facts that show the type of relationship the parties had. This includes:

·         Written contracts describing the relationship the parties intended to create

·         Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay

·         The permanency of the relationship, and

·         The extent to which services performed by the worker are a key aspect of the regular business of the company


On the Topic 762 page, the IRS lists additional information and links.  See also 26 C.F.R. Section 31.3121(d)-(1)(c)(2) and 31.3401(c)-1(b).


Passport Software can help you simplify ACA compliance throughout the year with our comprehensive ACA Software.  Contact Us – We are here to help.

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