Five years ago, Microsoft settled with a group of workers who sued the software giant claiming they had been improperly classified as independent contractors. The deal cost Microsoft $98 million. These days, as companies of all kinds try to cut costs, the temptation to shift employees to the status of contract workers is enormous. Indeed, even as the economy has shed more than 5 million jobs, the number of independent contractors has actually grown to more than 9 million, suggesting some companies are doing exactly that.

Now the Internal Revenue Service has announced that it intends to crack down on what it calls "misclassified employees" with an audit program of some 6,000 randomly selected businesses that will begin in February. The IRS says that in addition to misclassified employees, it will be looking for other employee compensation violations, such as improper payment of executives' income taxes and unaccounted-for provision of company vehicles to employees or the use of company property by employees.

The IRS calculates that it may be losing as much as $20 billion a year because of misclassification of employees alone. Meanwhile, workers who are improperly classified as independent contractors end up having to pay their full Social Security tax bill, instead of only half, as well as the 2.9% Medicaid tax normally paid by employers. They also lose unemployment insurance coverage.

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