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N.J. targeting firms that misclassify independent contractors

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in Compensation and Benefits,Human Resources,Small Business Tax,Small Business Tax Deduction Strategies

It looks like Gov. Jon Corzine is serious about making sure employers don’t misclassify their employees as independent contractors to avoid paying taxes. Corzine has directed the state’s Department of Labor and Workforce Development to step up audits on worker classification.

The state is cranking up the audit heat because New Jersey loses about $5 million in gross income taxes per year due to employers misclassifying workers. In 2005, the state discovered 26,000 workers misclassified as independent contractors.

Organizations have long known that using independent contractors (rather than employees) saves money and hassle. Companies that hire contractors don’t have to withhold payroll taxes from them, pay them benefits or worry about workers’ comp insurance for them.

If you misclassify workers, you risk paying hefty penalties even if your mistake is unintentional. And it doesn’t matter that the person you hired signed an agreement saying that he or she is an independent contractor. What matters is the relationship you have with the person and how he or she performs the work.

Advice: With more audits on the way, make sure you’re in compliance. New Jersey has one of the toughest tests in the country. The state defines an independent contractor as one who:

  • Retains all control or direction over his work.
  • Engaged in the established trade or business before you engaged him.
  • Would still be engaged in the business if you terminated your relationship.
  • Risks making a profit or loss, advertises his business and has invested in his business.

If a person doesn’t meet these tests, he must be your employee, not an independent contractor.  

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