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Tuesday, August 26, 2014
Got Independent Contractors? The IRS Wants to Audit You
The 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.
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 prosecution.
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.