Got Independent Contractors?
The IRS Wants to Audit You
IRS has warned business owners who are using independent contractors as
labor or service providers of the potential for a tax evasion audit.
Employers have long held the incentive to classify their employees as
self-employed independent contractors because they avoid paying employer
FICA, federal and state unemployment, worker compensation, medical
insurance, holiday pay, and other fringe benefits. However, any sort of
misclassification can lead to serious consequences under the law.
Here’s what you need to know if you are or are considering hiring independent contractors for your business:
Reporting Of Expenditures You
must report all expenditures to independent contractors that exceed
over $600 in a calendar year on a 1099 form. This is not limited to
corporations, which is a popular misconception.
Misclassification Risks While
it is often difficult to identify who is an independent contractor
versus who is an employee, the IRS believes that misclassification of
employees as contractors should be prosecuted aggressively. The
Department of Labor, the IRS and its cohorts state that even businesses
who have a good faith belief that they are lawfully conducting their
business still run the risk of audit due to widespread abuse of tax
evasion attempts. Each state as well as the IRS has guidelines and tools
that can help employers in classifying their employees.
You Are A Target All
taxing authorities, including the IRS, the State and the Department of
Labor are targeting all businesses with independent contractors. The
reason for this scrutiny is that these authorities have determined that
many businesses who use independent contractors also attempt to avoid
paying taxes on such persons. Should you be caught, the government will
asses heavy penalties. Economic loss arguments are not a defense against
Assess Risks The
financial burden that inevitably follows improper classification far
exceeds the benefits gained short term. Thus prior to implementing any
independent contractors in your business, you should conduct a thorough
analysis with your legal and financial counselors to assess whether you
are putting your business at risk or not.