Today, we are building upon our recent blog discussion of payroll taxes and employer classification of workers as indendent contractors.  As a general rule, the IRS cannot challenge an employer's classification so long as the company files timely 1099's and has a reasonable basis (ie. not cooked up after the fact) for the classification.  There have been recent ruminations from legislators that they are attempting to phase out employer reliance on industry standards (i.e. our industry has always thought of its workers as independent contractors) as a reasonable basis for calling workers independent contractors, but those efforts may be stalled in the water for now.

Not to be outdone or delayed by lawmakers, the IRS plans to conduct exams of business compliance with independent contractor classifications.  Certain studies employed by the IRS show that employer misclassification is a contributing factor to the massive tax gap (that number that the IRS believes should be paid vs. what taxpayers are actually paying).  They will also be reaching out to workers whom the IRS believes to be misclassified to question them about their status as contractors.

I can tell you that we have seen a disproportionate number of these classification issues coming in to our office from business owners who have been contacted by revenue officers in the field.  As discussed in my previous blog post, if you are a small business that hires most of its work out through independent contract, this issue is best to tackle head-on before you are contacted by the IRS.  Business owners can take action now to build up a file on their rationale for classifying workers as independent contractors before being hit with payroll taxes, penalties and interest for their independent contractors. 

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