Archive for the ‘Employee’ Category

IRS To Audit Companies — Employment Tax

Monday, September 21st, 2009

The IRS will audit 6,000 U.S. companies to determine whether they pay all their required employment taxes to fund Social Security and Medicare benefits.  See Bloomberg News

The IRS said the audits will provide data for its first statistical analysis since 1984 of how often companies misclassify workers to duck tax obligations, fail to pay taxes on fringe benefits such as personal use of company cars, and improperly pay taxes for company executives. The audits will begin in February, and the companies will be randomly chosen.

IRS will be looking at employee classificaitons, meaning “Independent Contractor or Employee.” It is simple. Companies owe taxes for an employee–state and federal withholding, FICA, FUTA, Medicare etc. Many companies will carry workers as independent contractors in order to save money and not withhold taxes. Many independent contractors should really be classified as “employees” because they meet the working conditions tests used by IRS to determine a workers status.

If a company is audited and workers are found to be employees instead of independent contractors, past taxes will be owed by the company and the worker.

It is best to get legal counsel as soon as you get notice of an IRS audit.

Bill Lowrance

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More Employment Audits–Independent Contractor vs. Employee

Thursday, May 21st, 2009

The IRS is planning more employment tax audits and examinations over the next three years.  A national research project is underway right now and the IRS has announced that it will conduct detailed employment tax examinations of certain taxpayers.  The selection process for taxpayers has begun and the program will last for three years.

The IRS estimates there will be over 3000 examinations and audits.  Although the IRS may look at any line on an employment tax return during the examination, it will primarily focus on the following issues: (1) worker classification (employee vs. independent contractor), (2) fringe benefits, (3) officer’s compensation, and (4) reimbursed expenses.

Often the IRS will receive Form SS 8 from a worker who wants a determination of whether he/she is an independent contractor or employee.  The IRS will collect information from the worker and from the company involved.  The IRS will either conduct a compliance check, make a determination based on the information collected or conduct a detailed employment tax examinations.   If the IRS determines the worker is and was an employee, there are serious tax implications for the employer.  It could be costly for the employer in terms of back taxes. 

There are several ways to challenge the IRS’ decision about whether the worker is an independent contractor or an employee.  It is best to consult a tax professional if you have been contacted about an employment tax matter.

Bill Lowrance
Lowrance Law LLC
McLean, VA
703 506 1600

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Employee or Independent Contractor

Wednesday, February 11th, 2009

If someone works for you, are they an employee or independent contractor?  For an employee, you must withhold the usual taxes–social security, federal and state withholding, medicare and unemployment.  The employee pays part of the withholding and you pay additional amounts.  For an independent contractor, you pay a flat amount.  No taxes, social security or other amounts are withheld.  A small business paying employees pays a salary and also additional social security, medicare and unemployment taxes.  It costs the small business more money to have employees working than to have independent contractors working.

So, as a business owner you decide to classify all your workers as independent contractors so that you do not have to withhold taxes, social security, medicare and unemployment taxes.   Smart thinking, right?  Well, maybe not so smart.  The IRS has started an agency wide employment tax program that addresses worker classification and other employment tax issues, meaning you can look for more IRS enforcement in the future relating to worker classification.   

The Treasury Inspector General for Tax Administration (TIGTA), TIGTA, recently reported that misclassification of employees as independent contractors affects millions of workers and contributes to ever increasing the tax gap.  When an employee is misclassified, tax revenues are not reported or paid and the burden of uncollected taxes shifts to other taxpayers. Read Full Report Here

The IRS’ most recent estimate of the tax gap is approximately $345 billion. The employment tax portion of this figure due to under reporting is estimated to be about $54 billion with an estimated $1.6 billion being attributable to worker misclassification. However, the $1.6 billion estimate is based on Tax Year 1984 data. The IRS conducted a preliminary analysis of Fiscal Year 2006 operational and program data and found that under reporting attributable to misclassified workers is likely to be markedly higher than the $1.6 billion.

All this means is that the IRS sees significant losses in tax collection and will be instituting worker classification programs in the near future.

In my next post, I will tell you how the IRS decides if your worker is an employee or an independent contractor.

Bill Lowrance
McLean, VA

This post is not legal advice nor is it tax advice.

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Posted in Controversy, Employee, IRS, IRS Audits, Independent Contractor, Tax Problems, income tax | No Comments »
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