MightyRecruiterIRS Audit: Are You Misclassifying Your Temp Workers
It turns out that what you don’t know really can hurt you. Misclassified freelance workers cost the government billions in dollars annually. Uncle Sam is not happy about it, and he’s coming for his money. Many small businesses start with a dollar and a dream and burgeon into successful enterprises but do so while being oblivious to their IRS audit exposure. Business owners who have not addressed their payroll tax obligations dread the thought of additional cash outflow or fear being mummified by bureaucratic red tape. Fines and penalties for late filings discovered in an IRS audit are steep, and once the government has identified the deficiency, it may be even more difficult to come up with the compounded cash amount. Ignoring a company’s payroll tax analysis can be a big pitfall.
If a company’s workers are classified as employees, there are additional tax obligations and reporting requirements that must be identified. If the company only hires independent contractors, the IRS requires informational returns to be filed by the business, but the associated tax payment obligations are the responsibility of the worker.
Employee vs. Contractor
How does one spot these IRS audit payroll tax death traps Begin your analysis by evaluating the type of labor that the business uses and how those workers interact with the company. In true government style, the rules aren’t black and white and may require some subjective analysis for proper classification. However, there are several factors that can be used as references in the course of that analysis to increase your chances of ending up with the right outcome. One of the most pervasive factors in the evaluation is control. Generally, contractors dictate how they perform the service provided to a company, hence the ïindependentï part of the ïindependent contractorï designation. Conversely, an employer dictates the nature, extent, and timing of the work provided by an employee.
In litigated cases, courts have categorized control into three classes, which are often used as guides in an IRS audit. An evaluation of financial control would involve an analysis of whether or not the worker has expenses that the company has not reimbursed as well as whether or not the worker uses his or her own supplies and equipment to perform the service. If a worker is responsible for his or her own expenses and supplies, this leans more favorably to an independent contractor classification.
The second control class involves the analysis of who controls the worker’s behavior. Independent contractors are essentially running their own businesses. They have generally developed their own systems for performing tasks and require little training from the company. Employees often must be trained on a skill or task and rely on instruction to conform to a company’s methods. An employee is told what hours to work, where to do the work, and how to do it. Contractors are often expected to deliver a service by a specified deadline, and they are left to their own devices when it comes to development of the promised outcome.
An IRS audit may also analyze the relationship between the business owner and the worker. The relationship between the two may shed additional light on the independence of the contractor from the business under audit.
What’s the Right Choice
Fewer contractors and more employees is the most conservative method of classification. However, you don’t want your business to pay tax unnecessarily. Don’t forget that, depending on where your business is located, there could be local tax obligations as well.
While this all sounds like a lot of filing, don’t be dismayed. Payroll service companies specialize in assisting you with these endeavors. Besides, your federal payroll taxes are a primary revenue stream for social security benefits. That extra little bit of tax collected from a company’s employees may be going to support a fellow citizen who worked for his or her whole life, starting with a dollar and a dream.
An IRS audit isn’t something to fear if the company has done its due diligence and preemptively evaluated its workers for proper classification. Despite what the popular cartoon says, it’s not really all ïTHE IRS.ï A company can still be very profitable while staying compliant. It’s always good to have a few tax experts on your team to help you identify pitfalls that come with hiring new workers, but it’s also good to do some research on your own. For best strategies on developing your business with all-star hires, browse the resources provided here at the Mighty Recruiter.