The IRS announced last month that in the next three years it intends to conduct 6,000 random audits of all 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 driving the crackdown is clear. CNNMoney.com suggests that in the next 10 years, many rules will be greatly enforced of independent contractors and could generate up to $7 billion extra in tax revenues.
Millions of misclassifications
The BNET website has an article posted purporting that the IRS feels that over half of the independent contractors should be reclassified as employees. Independent contractors constitute 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.
Risk involved in cutting costs
In terms of talent and flexibility, independent contractors are extremely important to businesses. They can be disengaged and engaged again without the labor burden and red tape associated with full-time employees. It costs less to pay for independent contractors to put it simply. Employers who wrongly classify workers as independent contractors, however, risk liability for back taxes and significant fines, even when the misclassification is accidental.
IRS requirements for classification of employees and independent contractors are strict, but because employers stand to conserve so much money by classifying workers as independent contractors, they routinely disregard the rules. When employee compensation is reported on W-2 forms, companies who pay compensation on IRS for 1099 do not pay the payroll taxes and unemployment insurance.
Domino effect because of IRS audits
According to CNNMoney.com and Gene Zaino, president and CEO of MBO Partners, most states now share data with the IRS and a noncompliance finding by the IRS is likely to lead to difficulties with state labor department and other state agencies as well. All companies that are trying to keep away from paying unemployment insurance costs should take the steps needed to verify independent contractor classifications given the interconnectedness of the federal and state tax agencies as well as the new IRS compliance agenda.
Workers and businesses have to verify classification status
All companies that have independent contractors should review the applicable state and IRS classification guidelines or get a hold of a tax attorney. All employees or workers that are not sure about their classification can request a status determination by filing IRS Form SS-8.
Some get good news
As the IRS heightens enforcement of classification rules, the footloose hiring and firing of independent contractors may become a thing of the past. This is good news for workers who’ve gone years without social security or unemployment entitlements, and who’ve had to pay self-employment taxes as a consequence of misclassification. This possible classification as an employee will make it simpler to qualify for forms of consumer credit such as payday loans, home mortgages, and auto financing.
