IRS Cracking Down on Independent Contractors

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Is that person that works for you an “employee” or “independent contractor?” What you think doesn’t matter to the IRS. They think around 80% of independent contractors are accidentally, but mostly intentionally misclassified that way. And they’re so serious about it that they’ve hired an additional 100 personnel to conduct investigations.

And here’s why the IRS is so interested: a lot of money is in it for them. They believe they can recover an additional $7 billion in revenue over the next decade. They can charge you up to 41.5% of the contractor’s pay for up to three years.

Here’s how the penalties break down:

  • 3% Social Security Tax
  • 0% Federal Income Tax
  • 2% Unemployment Insurance

They also may charge you penalties for forms you failed to file. When all is said and done, the costs add up big time.

What does 41.5% of the contractor’s pay for the past three years add up to for your company?

Why Is the IRS Suddenly Concerned with Misclassification of Independent Contractors?

The IRS is aware this happens in error. However, they believe many employers do this intentionally to dodge labor costs and state and federal taxes. Employers can also dodge antidiscrimination laws by doing this.

They also hired M. Patricia Smith, who successfully led the crack-down on misclassification in New York, to lead the new charge. So it’s good timing in that regard.

How Do You Know If You Have an Employee Misclassified as an Independent Contractor?

It’s not a simple matter at all. Is anything with the IRS simple? They actually analyze a number of factors to make the determination.

Here’s a general overview of how they look at it:

  1. Do you have control over the worker, or the right to control the worker, and how they do the job? If you do, it’s likely that worker should be an employee.
  2. Do you control how you pay the worker? For example, only a contractor can experience a profit or loss – employees cannot.
  3. Do you have a written contract with the worker, and does the worker get benefits typically reserved for employees?
  4. Is the relationship permanent? Relationships with contractors typically come to an end after a defined period of time, or they start and end for agreed-upon time periods.

 

What Should You Do If You Think You Have Misclassified Employees as Contractors?

 

You need to seek professional counsel immediately. They can help you determine the next steps to take so you avoid massive fines and penalties.