Last month the IRS announced that over the next three years it will perform 6,000 random audits of 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 extra in tax revenues should be produced just by shoring up the rules of independent contractors, as stated by CNNMoney.com.
Millions of misclassifications
The IRS thinks that over 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. 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 could possibly be risky
Independent contractors are invaluable to many companies, in terms of flexibility as well as 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. It costs less to pay for independent contractors to put it simply. Employers who wrongly classify workers as independent contractors, however, risk liability for back taxes and significant fines, even when the misclassification is accidental.
Just by classifying an employee differently, a company will save numerous cash making them disregard the strict rules from the IRS. When employee compensation is reported on W-2 forms, companies who pay compensation on IRS for 1099 do not pay the payroll taxes and unemployment insurance.
IRS audits might cause domino effect
According to CNNMoney.com and Gene Zaino, president and CEO of MBO Partners, most states now share data with the IRS and a noncompliance finding by the IRS is likely to lead to difficulties with state labor department and other state agencies also. All companies 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
All businesses that have independent contractors should review the applicable state and IRS classification guidelines or get a hold of 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
Since the IRS is heightening enforcement of classification rules, the freewheeling hiring and firing of independent contractors could become something in the past. This is a bonus for those who has gone years without social security or unemployment entitlements, and those who have been required pay self-employment taxes as a side effect 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.
