Subadhra Sriram's Blog

The IRS Will Not Look the Other Way

Yes, we know there’s been a recession. It’s been the worst economic crisis since the Great Depression; in fact the United States has never seen anything quite like this. But that does not mean the Internal Revenue Service http://www.irs.gov is going to overlook your worker classification errors -- or should I say misclassification peccadillos. 

In a recent conversation with the IRS on worker classification, I was told that companies are frantically cutting costs and getting careless about it. For instance, businesses big and small don’t want to increase headcount. So they are bringing in people to do the same jobs as their employees. http://www.sba.gov/content/independent-contractors-vs-employees  And then a disgruntled ‘contractor’ files an unemployment claim when the project is over. Contractors can’t file unemployment claims. As a result, the company is audited.

Then there are those corporations that are letting their independent contractors manage their own taxes, which previously were handled by the business. Some independent contractors skip paying taxes on their freelancing or consulting income altogether. But remember, before a contractor considers hiding income from the IRS, you should know that any client who pays a contractor more than $600 in any calendar year must report this income.

So the IRS will check a contractor’s tax returns to see whether they are reporting this income. Penalties and interest on back taxes, especially self-employment taxes, can be quite high. But the kicker is that the IRS uses this method to find companies to audit.

So the recession should make you even more vigilant about worker classification. To understand misclassification and get free advice from the IRS come to the Risk Forum http://www.staffingindustry.com/Store/Conferences/2011-CW-Risk-Forum-Registration-1306 at Las Vegas in October.  You won’t be disappointed.

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