Employee or Independent Contractor?

The Federal government is missing out on millions of dollars in payroll taxes (Social Security and Medicare) because of businesses failing to properly report payroll.

Mis-classified workers remain a priority. Many small businesses, either erroneously or intentionally, will pay wages to people as contractors, when they should be employees. A good guite for the difference is a pamphlet put out by IRS called Independent Contractor or Employee? Click on the title to review.

The Revenue Service knows that a large number of businesses circumvent their payroll tax responsibilities by calling workers independent contractors when they are in actuality employees. IRS is planning to ramp up its efforts to seek back payroll taxes and penalties from firms that wrongly treat workers as contractors. The Labor Dept. and states are also involved in determining which classification they workers should be in, and they share their audit results with the IRS.

Some businesses can come forward and correct misclassification errors. Firms that have consistently treated workers as contractors and given them 1099s can come to IRS, pay a modest fine and receive audit protection for earlier years. However, the company must agree to treat the workers as employees in the future.

If you have people working for you, it is important that you review the status of these individuals. While the IRS is bad when it comes to dealing with this issue, many states (like California) are vicious and could end up costing you your business. Make sure that you are doing it right.

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