What is Wage Recharacterization?
Wage recharacterization is the practice of willfully reducing wages (taxable income) and replacing it with non-taxable compensation with the intent of avoiding payroll taxes. This can be suspected in a number of ways. Here are just a couple of ways this can happen:
A company has a number of travelers working at the same location. One gets $30/hr wages plus $7/hr reimbursements. Another gets $20/hr plus $17/hr in reimbursements. (Note both are getting the equivalent of $37/hr.)
A company presents contracts that offer the choice of picking between a taxed wage and the option of a reduced rate with tax-free reimbursement payments in its place.
The consequence of this type of practice is that the company can be accused of manipulating pier diem rates when calculating overtime. For much deeper insight on this topic, take a look at this piece written by our very own founder and president, Joseph Smith. Also, check out this report on a pivotal court case.