Audit Triggers: Here is what happens when your independent contractor files for unemployment.

Do you know about the most common audit trigger for small businesses?

Today, I’m going to be talking about an audit trigger so common, I’m considering coining a name for it…

”The Surprise Audit Sneak-Attack”.

Does it sound like I’m being dramatic?

Imagine how shocked you would feel if you were just browsing through your mail and you come across an official looking document with the dreaded words in it: “AUDIT NOTICE”

I imagine you’d be very shocked…bewildered even. 

But this is the type of mail that can follow when an Independent Contractor files for unemployment. 

Scarily, this is the number 1 audit trigger I see happening to small businesses and they almost never see it coming. 

Why does an independent contractor filing for unemployment trigger an audit?

Let’s say Frank Freelancer files for unemployment and puts Barbara Business-Owner as his employer. The people down at the unemployment office tilt their heads in confusion. 

Remember that freelancers function as a business, not employees. As a business owner, he has the ability to take on multiple clients – Barbara’s business being just one of them. In other words, he is completely independent of Barbara’s company. 

As an independent contractor, the assumption is that Frank Freelancer works with multiple clients, he has multiple streams of income. 

So when Barbara Business-Owner no longer requires Frank’s services and ends his contract, he is not “unemployed”. He has not lost his sole stream of income, but he now has an opening for a new client. 

And that is the train of thought that the people down at the unemployment office go through. 

If your independent contractor files for unemployment, they will think:

“If Frank Freelancer is an employee of Barbara Business-Owner, then why didn’t we have any taxes paid on his behalf? 

Is the business owner in violation of worker’s rights and protection regulation?”

Those protections include *drumroll please* unemployment insurance…

With this happening behind the scenes, your business will have an audit carried out to determine if you have misclassified your independent contractor.

You can see why I call it ‘The Surprise Audit Sneak-Attack’, right?

How do I prevent my contractors from filing for unemployment?

You may be reading this and thinking:

“This is out of my control!”

You probably didn’t even realize that this is possible, let alone that it could set your business up for a full-blown audit. 

I understand why you would feel that way. The most important tip I have for you is to be extremely proactive in your conversations with your contractors. Let them know that due to their classification, they should not file for unemployment once their contract ends. 

And we would love to help guide you through all this!

During our consultation, we will take a look into your relationship with your workers, and determine if you need to make any changes. 

Contact us today to prevent an unexpected audit notice!

ClearPath is a leading Human Resources Outsourcing company focusing on assisting employers to leverage the independent contractor labor market. We’re committed to helping business owners stay compliant and minimize the risks associated with their contingent labor requirements. Contact us today to make an appointment.

No Legal Advice Intended. This article includes general information about legal issues and developments in the law. Such materials are for informational purposes only and may not reflect the most current legal developments. These informational materials are not intended, and must not be taken, as legal advice on any particular set of facts or circumstances. You need to contact a lawyer licensed in your jurisdiction for advice on specific legal issues.