Switching to Independent Contractors
Draws Scrutiny from IRS and Department of Labor
With the current state of the economy, shifting from full-time employees to independent contractors is a cost-cutting measure that some businesses have implemented. This saves the business money by shifting the burden of payroll taxes to the worker, and lowering or eliminating unemployment insurance premiums and/or workers compensation premiums.
Misclassified Workers Result in Additional Taxes and Penalties
But according to a recent ABA article, for those who have misclassified their workforce, the glare of the IRS spotlight may soon be upon them. According to the article, over the next three years, the Internal Revenue Service is auditing 6,000 randomly selected businesses to determine whether they have workers who’ve been classified as contractors when they should be treated as employees. When appropriately done, classifying a worker as a contractor allows a business to escape unemployment, Social Security and Medicare taxes and overtime pay.
However, if a business has misclassified a worker, additional taxes, penalties and interest will be the result.
The ABA reports that “The Department of Labor is also cracking down,” says Annette Idalski, chair of the labor and employment litigation group at Chamberlain, Hrdlicka, White, Williams & Martin in Atlanta. “We’ve seen a 50 percent increase in our DOL activity. Several employers have been hit with DOL audits … and are facing devastating damages calculations on back pay alone.
Consult an Attorney Before Reclassifying Workers to Self-Employed
If you own a business and are considering reclassifying your employees to self-employed, independent contractors, there is a very complicated set of standards which must be applied to determine if the reclassification is proper and within the IRS guidelines. You should consult with an attorney or a Certified Public Accountant (CPA) before you decide to turn your employees into contractors. If you make the determination that you can reclassify employees to independent contractors make sure you retain an attorney to prepare a written contract to be entered between you and the independent contractor. This will not only help with a future IRS or DOL inquiry, but will also protect you and your self-employed contractors from other issues that may arise between you or other entities.