The IRS announced last month that over the next three years it intends to conduct 6,000 random audits of all businesses that utilize independent contractors. The motivation seems clear considering the fact 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. Over the next ten years as much as $7 billion more in tax revenues should be produced just by shoring up the rules of independent contractors, as stated by CNNMoney.com.
There are millions of misclassifications
The IRS thinks that more than 5 million workers that are being paid as independent contractors should be reclassified as employees, as said in an article posted on the BNET web site. MBO Partners, a business service firm concentrating in placement of consultants and freelancers, claims that independent contractors are currently the fastest growing segment of the American workforce.
Risk involved in cutting costs
Many businesses put extreme value in independent contractors in terms of flexibility and talent. They could be engaged and disengaged sans the red tape and labor burden associated with hiring full-time employees. In simple terms, it will price less to pay independent contractors. Even if the misclassification is unintentional, improperly classifying workers as independent contractors could mean back taxes and many fines.
Just by classifying an employee differently, a company will save numerous cash making them disregard the strict rules from the IRS. Companies pay the contractors and report it on the IRS 1099 form, yet they don’t pay the payroll taxes or unemployment insurance required when employee compensation is reported on W-2 forms.
Domino effect because of IRS audits
CNNMoney.com and president and CEO of MBO Partners, Gene Zaino, say that most states share data with the IRS now and a noncompliance finding by the IRS will probably lead to issues with the state labor department and many other state agencies. All businesses that are trying to stay clear of 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.
Businesses and workers should verify classification status
Companies who have independent contractors working for them have to review the applicable state and IRS classification guidelines or discover themselves 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.
Good news for some
Since the IRS is increasing enforcement of classification rules, the random hiring and firing of independent contractors could become something in 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 result 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.
