In the next 3 years the IRS has announced that they plan to conduct 6,000 random audits of any companies that use independent contractors. The motivation seems clear considering the fact that more than half of the states are borrowing money from the federal government to help pay unemployment claims since there are record numbers of Americans out of work. CNNMoney.com estimates that in the next 10 years, many rules will be greatly enforced upon independent contractors and could generate up to $7 billion extra in tax revenues.
There are millions of misclassifications
The BNET website has an article posted saying that how the IRS feels that over half of the independent contractors should be reclassified as employees. A business service firm specializing in placement of freelancers and consultants called MBO Partners claims that independent contractors are at present the fastest growing part of the American workforce.
Cutting costs can be risky
In terms of talent and flexibility, independent contractors are extremely important to businesses. They can be engaged and disengaged without the red tape and labor burden that comes with hiring full-time employees. It costs less to pay for independent contractors to put it simply. However, any employers who classify workers as independent contractors incorrectly risk that liability for many significant fines and back taxes, even if the mistake is unintentional.
IRS requirements for classification of employees and independent contractors are strict, but since employers stand to conserve so much money by classifying workers as independent contractors, they regularly disregard the rules. When employers pay independent contractors and report the compensation on IRS form 1099, they don’t pay the payroll taxes and unemployment insurance necessary 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 difficulties with the state labor department and many other state agencies. All companies that are trying to steer clear of paying unemployment insurance funds should take the steps needed to verify independent contractor classifications given the interconnectedness of the federal and state tax agencies also as the new IRS compliance agenda.
Workers and companies have to 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 random hiring and firing of independent contractors might be in the past as the IRS heightens enforcement of classification rules. This is good news for workers who’ve gone years without social security or unemployment entitlements, and who’ve been having to pay self-employment taxes as a result of 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.
