If you're audited, the IRS will examine your payroll, benefits and executive compensation.
The IRS has changed its standards for determining whether a worker is an employee or a contractor. The agency now follows 10 set factors – down from 20 – to decide which category a worker belongs in. If you’re facing an IRS audit, you need to be able to explain why you categorize your workers the way you do. LEARN MOREThe suspect misclassification
IRS officials believe tough economic times have led more employers to classify members of their workforce—often incorrectly—as independent contractors.
Slapping the contractor label on a worker saves the employer money, as they don’t need to pay for independent contractors’ insurance, benefits or for the employers’ half of the Social Security and Medicare taxes on workers’ wages.
But if the IRS, Department of Labor or a state agency determines that you’ve misclassified workers, the mistake can lead to tremendous liability. In addition to overtime, your former independent contractors may seek employee status to collect workers’ comp, unemployment benefits or damages in a civil rights lawsuit.
Using Independent Contractors: Legal Safeguards & Compliance Tips provides you with everything you need to know in order to comply with IRS requirements...How can you make the right call?
The fault line in the great “employee or contractor” divide lies in how much control the employer has over the worker’s schedule, materials, behavior, risk level, etc. Labels don’t count. If it works like an employee and is paid like an employee, it’s probably an employee.
The last time the IRS studied misclassification, in 1984, it estimated that about 15% of employers nationally misclassified a total of 3.4 million employees as independent contractors. A 2005 government report said 10.3 million American workers—or about 7.4% of the workforce—were classified as independent contractors.
FedEx is the poster child for the contractor battle. The IRS originally hit the company with a $319 million tax assessment for improperly classifying 12,000 of its drivers as independent contractors. But in November, the IRS backed off the assessment and allowed the workers to be classified as employees. Still, several states aren’t giving up the fight ... they plan to sue FedEx over those classifications.
FedEx isn’t the only state target. States are cracking down on improper misclassifications across the board.
In Using Independent Contractors you’ll find:
Using Independent Contractors: Legal Safeguards & Compliance Tips prepares you for any scenario the IRS might challenge. You’ll know which workers are contractors, which aren’t and how to protect yourself from any backlash you might face. You can avoid putting your business at risk and save yourself time and money.
- The IRS’ 10-question “test” to establish worker classification
- A sample contract to make freelance relationships stick
- Guidelines for 22 states with contracting rules stricter than the IRS’
- A list of errors commonly made on 1099s
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- How to Fire an Employee the Legal Way: 6 Termination Guidelines
- 10 Secrets to an Effective Performance Review
- Laying off the layoffs
- When salaries differ within job classification, be prepared to offer data explaining why
- Keep careful track of work-restriction notes
- You can't make employees contribute to charity