It is very important to make the proper decision about employee classification. If an employee is incorrectly identified as an independent contractor you may be liable for the self-employment taxes that you should have paid plus penalties. If you are unsure, don’t feel bad as you have company. Congress’ General Accounting Office has estimated that 38% of employers examined, misclassified “independent contractors”. The IRS has enacted a plan to audit 6,000 more businesses over the next three years, and misclassification of employees as contractors is one of the primary targets.
The IRS, U.S. Department of Labor, and state governments have a big stake in correctly classifying workers. Improper treatment of workers as independent contractors costs the government tax revenue, in the form of lost withholding, unemployment, workers’ compensation, and Social Security and Medicare taxes. This opportunity for reclaiming revenue has led to renewed compliance efforts.
With the recent economic stress on small businesses, chances are that the use of contractors has increased significantly and we may predict an even greater use of independent contractors in the next 10 years. After all, independent contractors can be up to 30% cheaper than employees and are not subject to burdensome employment rules, making independent contractors more attractive.
The IRS is stepping up worker reclassification efforts, which represent a substantial revenue opportunity. In fact, a 2009 U.S. Government Accountability Office report stated that approximately 71% of IRS worker misclassification examinations result in changes to worker status. The IRS is currently finalizing a three-year National Research Program initiative that included random audits of 6600 employers which will quantify levels of worker misclassification. It is expected that the IRS and many states expect the study to reveal significant noncompliance.
Employee status will be even more important in 2014 due to the Patient Protection and Affordable Care Act which mandates that employers with at least 50 full-time employees provide health care insurance or pay a stiff penalty.
Worker reclassification has also been of interest to the Obama administration. In 2011, the DOL confirmed its commitment to use audit and enforcement resources to address the growing problem of employee misclassification. There is also a coordinated effort among the IRS, DOL, and many states to share audit findings and pool resources to address worker classification. The IRS said that it is coordinating employment tax examination findings with 37 states.
If you think you might be vulnerable to misclassifying an employee as an independent contractor please reach out to us, we can help.
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