IRS Audits Take Aim At Independent Contractors
Last month the IRS announced that over the next three years it will conduct 6,000 random audits of businesses that utilize independent contractors. With record numbers of Americans out of work and more than half the states borrowing from the federal government to pay unemployment claims, the motivation behind the crackdown is clear. According to CNNMoney.com, over the next 10 years, heightened enforcement of independent contractor rules could generate as much as $7 billion in extra cash from tax revenues.
There are millions of misclassifications
An article posted on the BNET web site states that the IRS estimates that more than half of the approximately 5 million workers being paid as independent contractors should be reclassified as employees. Independent contractors are the fastest growing segment of the American workforce as stated by MBO Partners which is a business service that helps with the placement of consultant and freelancers.
Cutting costs can be risky
Independent contractors are invaluable to many businesses, in terms of flexibility as well as talent. They can be disengaged and engaged again without the labor burden and red tape that comes with full-time employees. It costs less to pay for independent contractors to put it simply. Employers who improperly classify workers as independent contractors, however, risk liability for back taxes and significant fines, even when the misclassification is unintentional.
Just by classifying an employee differently, a company will save a lot of money making them disregard the strict rules from the IRS. When employers pay independent contractors and report the compensation on IRS form 1099, they do not pay the payroll taxes and unemployment insurance required when employee compensation is reported on W-2 forms.
IRS audits may have a domino effect
Most states share their data with the IRS and an noncompliance finding by the IRS would result in issues with the state labor department as well as with other state agencies, as stated by Gene Zaino, president and CEO of MBO Partner, and CNNMoney.com. Given the interconnectedness of federal and state tax agencies and the IRS compliance agenda, all businesses that are hoping to avoid paying unemployment insurance funds need to take the appropriate steps to verify independent-contractor classifications.
Workers and businesses need to verify classification status
All businesses that have independent contractors should review the applicable state and IRS classification guidelines or get a hold of a tax attorney. Any workers or employees who are unsure of their classification can request a status determination by filing IRS Form SS-8.
Good news for some
Since the IRS is heightening enforcement of classification rules, the random hiring and firing of independent contractors could become something in the past. This is wonderful for those who have had to pay self-employment taxes and have gone years without social security or unemployment entitlements as a result of the misclassification. This possible classification as an employee will make it easier to qualify for forms of consumer credit such as payday loans, home mortgages, and auto financing.