IRS Crackdown on Employers Who Improperly Use Independent Contractors

The IRS revealed last week a new program where business owners, particularly those that own small businesses, need to reclassify contractors as employees and make a small payment to cover past payroll taxes. The article Price of Reclassifying Workers, written by Sarah E. Needleman and Emily Maltby comes after an ultimatum by the IRS for small businesses (which tend to have less staff and a looser structure): raise operating costs by increasing staff or face an audit with costly penalties.

I blogged about this last week when I talked about the IRS New voluntary Worker Classification Settlement Program.
The reason behind this new push by the IRS is due to the increase in independent contractors during the recession. The IRS is starting to implement tougher regulation on misclassification. The Voluntary Worker Classification Settlement Program aims to aid employers in correcting any misclassified employee or independent contractor, eliminating the need for costly audits and bigger penalties. Employers who partake in the program will pay 10% of the tax liability that would have otherwise been due on the employee’s compensation.

Employers tend to favor independent contractors over regular employees as generally there are less costs involved. For example, employers would pay taxes on wages and provide for benefits for their employees. Whereas when a company has more staff, obligations increase, such as offering unpaid maternity leave (the Family and Medical Leave Act) and providing health insurance (2014 Patient Protection and Affordable Care Act) (Price of Reclassifying Workers).

Small business owners aim to keep staff count below the requirement in which further regulations and costs may arise. Often, owners express confusion over the need to reclassify their workers as the distinction between contract worker and employee is not clear. The IRS too, states that there is no clear separation of factors that distinguishes one from the other, rather some factors to consider are the employer’s control over a worker and contract provisions such as paid expenses.

There is some skepticism around this new measure by the IRS and employers are wondering weather they’ll really be let off the hook. Mark Fraust, president of Echelon Management based in Cincinnati, has zero full-time employees and relies on six contractors who log in more than 40 hours a week. Mr. Fraust sees no need to reclassify his workers as none are provided with an office or workplace. Further more, not all independent contractors want to be employees. The president of Kaelin Corp, Mark Clemens, states he wanted to convert his ten misclassified contract workers into employees five years ago, however seven of the ten refused to continue working for the business for various reasons, such as wishing to avoid a W-2. The trade off in hiring seven new employees was an increase in Mr. Clemens’ expenses by $1,500/year for each of the ten jobs that were converted into full-time employee status, however now he has a dedicated and reliable workforce as well as double the annual revenue.

Read more examples of the mixed views of this program from the article the Price or Reclassifying Workers found on The Wall Street Journal. This new measure by the IRS is just another step aimed at cracking down on money owed. Do not risk an IRS audit for your business. If you owe back taxes or have payroll tax problems, check out our tax help services. Do not let tax debts hold your business back, seek help now.

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