The IRS announced last month that over the next three years it plans to conduct 6,000 random audits of all companies that utilize independent contractors. The motivation seems clear considering the fact that more than half of the states are borrowing cash from the federal government to help pay unemployment claims since there are record numbers of Americans unemployed. CNNMoney.com suggests that in the next 10 years, many rules will be greatly enforced of independent contractors and could generate as much as $7 billion extra in tax revenues.
Millions of misclassifications were found
The IRS thinks that more than 5 million workers that are being paid as independent contractors ought to be reclassified as employees, as said in an article posted on the BNET web site. A business service firm focusing in placement of freelancers and consultants called MBO Partners claims that independent contractors are at present the fastest growing part of the American workforce.
Risk involved in cutting costs
In terms of talent and flexibility, independent contractors are terribly important to businesses. They don’t have the burden of full-time employees since they can be engaged and disengaged without the labor burden and red tape that comes with it. It costs less to pay for independent contractors to put it simply. However, any employers who classify workers as independent contractors improperly risk that liability for many significant fines and back taxes, even if the mistake is not intended.
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 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.
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 issues with state labor department and other state agencies as well. All businesses that are trying to stay away from paying unemployment insurance costs should take the steps necessary to verify independent contractor classifications given the interconnectedness of the federal and state tax agencies as well as the new IRS compliance agenda.
Any business or workers wondering should verify classification status
Businesses that utilize independent contractors should review applicable state and IRS classification guidelines or consult 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.
The good news
The arbitrary hiring and firing of independent contractors may be in the past as the IRS heightens enforcement of classification rules. This is a deliverance for those who have had to pay self-employment taxes and have gone years without social security or unemployment entitlements because of the misclassification. Classification as an employee also makes it easier to qualify for auto financing, home mortgages, payday loans and other forms of consumer credit.
