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Better Find Out Now!

Before The IRS Does

As a business owner, you would rather pay independent contractors than employees.  This allows you to avoid paying payroll taxes, unemployment taxes, and higher worker compensation insurance costs. As an Employee, you might rather be an independent contractor because of some very nice tax advantages. It can be win-win.

But be careful since the IRS looks closely at who is and who is not an independent contractor. The agency has stepped up its audits of small businesses, looking very closely at independent contractors as a means of collecting taxes and penalties.  When the IRS catches an employee who was categorized as an independent contractor, stuff really hits the fan for the employer.  There is the assessment of payroll taxes (12.5% of wages earned by the employee) PLUS Interest PLUS Penalties for not filing the required payroll forms.  When they are done you will end up paying way more than was due to begin with.  This does not include the additional costs of workers compensation insurance or unemployment insurance that will also result.

It is most common for these issues to come to the attention of the IRS when one of the following happens;

A routine examination of the return;

An independent contractor applies for unemployment benefits, triggering an inquiry;

An independent contractor file an SS-8 form claiming to be employee, usually after finding out what their tax bill is for not being treated as one by their employer;

There is a sudden change in the number of employees, especially if the amount spent on contractors’ swings in the opposite direction. (This happens when an employer suddenly decides to fire every employee, but to rehire them as independent contractors, but to do the same job.  Our states and various education departments are famous for this by allowing retired employees to work for the same entity as “Consultants”

There are 20 factors that must be considered to determine independent contractor status. No special credence is given to any one of the factors. This means that you will need to error on the side of caution, as the penalties for misclassifying an employee are steep.  It is my opinion that at least half of these conditions need to be met to even consider calling a worker an independent contractor.  It is also important to understand that these can mean different things in different situations.

1)      Who has the control over how, when and where the work is accomplished?

2)      How much actual training is provided?

3)      Are the Services provided integrated with the company's operations?

4)      Are you required to perform the services personally, or can you delegate?

5)      Who has the right to hire, supervise, and pay assistants?

6)      What is the relationship with the company and is it continuing?

7)      Who sets the hours of work?

8)      Does the individual work full-time for the company or is there other jobs they are doing?

9)      Does the individual work at the company's location?

10)  Does the individual set the steps in which the work will be done?

11)  Is the individual required to submit written or oral reports?

12)  Does the individual get paid by the job rather than by the week or month?

13)  Does the individual reimbursed for business or traveling expenses?

14)  Does the individual provide their own equipment and supplies?

15)  Does the individual invest in the facilities they use for doing the work?

16)  Does the individual realize a profit or suffer a loss as a result of their services?

17)  Does the individual work for many different companies at the same time?

18)  Are the individuals’ services available to the general public on a regular basis?

19)  Does the individual risk being fired as long as they produce the requested work?

20)  Is the individual able to terminate their relationship with the company prior to work completion without liability?

I AGAIN WANT TO MAKE THIS CLERAR:  THERE IS NO PREFERENCE GIVEN TO ANY OF THE ABOVE, EACH SITUATION IS DIFFERENT.  CONSULT YOUR OWN TAX ADVISOR, OR CALL ME IF YOU HAVE EVEN THE SMALLEST QUESTION OR DOUBT!