Status Quotient How to determine whether to classify workers as employees or independent contractors.

The question of whether to classify workers as independentcontractors or employees continues to haunt most small-businessowners. But entrepreneurs aren't the only ones plagued by thisshady issue; because of misclassifications, the IRS loses more than$38 billion in employment taxes each year.

The IRS also says that, besides the employment tax loss, many ofthese misclassified workers aren't paying income taxes. Theagency's statistics show that when the business fails to filewith the IRS, less than 30 percent of the workers report theircompensation.

Businesses have good reasons for misclassifying. Because thereis no clear definition between classifications, and testsdistinguishing the status of each are complicated and subjective.Aside from that, organizations have a strong incentive to opt forindependent-contractor classification. With independentcontractors, companies need not keep track of withheld incometaxes, which can be difficult in high employee-turnover industries,nor do they have to pay hefty Social Security taxes. Additionally,some workers refuse to allow anyone to report their names andcompensation to the government.