The IRS announced last month that in the next three years it plans to conduct 6,000 random audits of all businesses that utilize independent contractors. More than half of the states are borrowing cash from the federal government to pay off unemployment claims since there are rising numbers of Americans out of work, making the motivation behind this clear. 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.
Millions of misclassifications were found
The BNET website has an article posted purporting that that the IRS feels that over half of the independent contractors should be reclassified as employees. Independent contractors are 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.
Cutting costs might be risky
Many businesses put extreme value in independent contractors in terms of flexibility and talent. They don’t have the encumbrance of full-time employees since they could be engaged and disengaged without the labor burden and red tape that comes with it. Simply put, it costs less to pay independent contractors. Even if the misclassification is unintentional, improperly classifying workers as independent contractors could mean back taxes and many fines.
Although IRS requirements are strict for the classification of employees vs. independent contractors, employers will disregard the rules to save such a large amount of cash. 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
Most states share their data with the IRS and an noncompliance finding by the IRS would result in issues with the state labor department as well as with other state agencies, as stated by Gene Zaino, president and CEO of MBO Partner, and CNNMoney.com. Given the interconnectedness of federal and state tax agencies and the IRS compliance agenda, all businesses that are hoping to keep away from paying unemployment insurance funds need to take the appropriate steps to verify independent-contractor classifications.
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. Any workers or employees who are unsure of their classification can request a status determination by filing IRS Form SS-8.
Good news for some
The random 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. This new classification may make it easier for people to qualify for auto financing, payday loans, home mortgages, and other forms of consumer credit.
