Yesterday I attended the live broadcast of a legal education program put on by the American Bar Association discussing the IRS Employment Tax National Research Project. As part of this project, the IRS intends to audit 6,000 businesses, both small and large, per year between 2010 and 2013. Part of what the IRS will be examining in these audits is the classification of employees; namely, whether they are classified as employees or independent contractors. If the IRS determines that a business is misclassifying an employee, tax liabilities and penalties can be severe.
To avoid controversy, an employer must take the steps to determine whether their workers fall into the category of an independent contractor or an employee. This process is often very complex and involves analysis of work procedures and corporate organization, along with examination of banking records and other criteria. While such a distinction is often case-specific, the general guideline is that a worker is considered an employee if the employer has the right to control the worker regarding what job is performed and how it is performed. Whether this right is exercised is irrelevant.
If you operate under the assumption that you are working with independent contractors rather than employees, and therefore do not have to withhold federal income and payroll taxes, it is important to remember to send a Form 1099 for the contractor to file. If the IRS does audit your business and determines that you are working with employees rather than independent contractors, filing Form 1099s could mean your company is entitled to the statutory safe harbor provided by section 530 of the Revenue Act of 1978.
Now that the IRS is enacting its Employment Tax National Research Project, it is more important than ever to make sure your company is up to date with the filing status of its workers. Failure to remain up to date with stricter IRS policy could result in tax liabilities.
If you are notified of an IRS audit or you want to discuss your employment practices, please don’t hesitate to contact me for further information:
Bill Lowrance, (703) 506-1600, firstname.lastname@example.org