August 16th, 2010 IRS auditors to crack down on independent contractors (v. employees)
In these economic times, many business owners may be tempted by the appeal of hiring independent contractors rather than employees, in order to avoid many of the costs and withholding requirements associated with employees. While classifying a worker as an independent contractor may provide financial savings and less paperwork for a business owner, it may also be a costly mistake if the classification was done improperly. The IRS does not favor independent contractors and, as discussed in the attached article, recently launched a new program that “will randomly examine 6,000 companies over the next three years for employee misclassifications. The federal government estimates it will raise $7 billion over the next 10 through tighter enforcement.”
http://money.cnn.com/2010/03/29/pf/taxes/employee_audit_crackdown.smb/index.htm
Many business owners mistakenly believe that they are protected by simply signing a contract with the worker stating that the worker is an independent contractor. However, the mere existence of an independent contractor’s agreement—no matter how well drafted—does not mean that the worker is not an employee in the eyes of the IRS. The contract is only one of the factors the IRS will look at in order to determine if the worker is an employee or independent contractor. The IRS considers the entire relationship and looks at three broad categories of factors including behavioral control, financial control, and the type of relationship of the parties. For more information on these factors, please see the IRS website:
http://www.irs.gov/businesses/small/article/0,,id=99921,00.html
Understanding these factors can help a business owner in considering whether to hire an employee or an independent contractor. Also, companies with existing independent contractors should consider an internal assessment of their current independent contractors to ensure that those relationships are correctly classified.
The distinction between employees and independent contractors is important. If there is any doubt in applying the IRS factors to a particular situation, a business owner should consult a knowledgeable attorney or tax professional.