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IRS audits set to increase over employee classifications

In uncertain economic times, a business may hire independent contractors to perform certain jobs. The benefit to the company is that the work gets done, and the company is not committed to a long-term relationship with the worker. There are no benefits to be paid, and the worker can come and go as the need arises.

However, if the worker performs the same job as an employee, has the same duties and responsibilities, the Internal Revenue Service may consider that person an employee. The bad news is that misclassification of employees as independent contractors can land a company is hot water, resulting in an IRS audit, payment of back taxes and penalties and perhaps result in a criminal charge. The good news is that there are steps a business can take to lessen the risk of that happening.

According to knowledgeable sources, there are steps a business can take to make sure that their independent contractors are truly independent, and not employees.

  • Training: From the top down, the training should differ. Managers must know how to treat an IC differently from other employees in terms of duties and responsibilities.
  • Procedures: Put everything in writing. Define who is, and who is not, a contractor and make sure everyone knows their role.
  • Forms: Avoid giving someone a 1099 and a W2 in the same year. It is less of a red flag to hire an IC as employee, but a transition in the other direction could trigger an audit.
  • Contractors: Make sure any independet contractors are submitting their paperwork properly. Submitting multiple SS-8 forms in the same year is another red flag.

In summary, attempting to cheat on one's taxes is asking for trouble. A business may consider hiring a legal tax professional to conduct an independent audit, if the business is concerned about their audit exposure.

Source: Consumer Electronics Net, "Professional Tax Resolution Announces IRS is Auditing Businesses that Inappropriately Classify Employees," Aug. 28, 2012

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