Feral Jundi

   I wanted to get this out there, because in this industry, independent contractors are what companies use to fill out their work force overseas.  But doom on the company that has improperly classified their workforce as independent contractors.  If you are a small business owner, or even one of the larger companies, it looks to me like the government is now on the war path to square this stuff away and get some revenue.  What will be interesting is to see how the IRS is able to re-interpret gray areas, to get that revenue.  Hopefully companies have done their homework and are squared away, but just a heads up, they are on the hunt.

    Of course actions like this will impact business and their ability to hire more folks.  And in a climate where jobs are a premium, I wonder if this is kind of a form of robbing peter to pay paul again?  But all in all, I like the fact that the government is trying to clamp down on these practices, because at least this will force companies to pay into government systems that were designed to support folks when they retire. (medicare, social security, etc.)  That’s if these companies are using folks more like employees, and less like IC’s.  We will see if this turns into a which hunt, or they actually do catch folks who are cheats.

   On the flip side, you now have another tool in your kit to get back at companies that are screwing you over.  Especially if you are a 1099 guy.  If your company is not playing by the rules, and has been playing some unethical games with you, then I am sure the IRS would love to hear what you know. Of course do it anonymously to protect yourself, and mention any intentional misclassification actions that your unscrupulous company is performing.  lol

   And hey, for those CEO’s and managers that are reading this, or even those contractors that think I am anti-PMC or something stupid like that, think about this.  I want companies to do things right and treat their people with respect.  I also want companies to be successful and profitable.  But I do not want companies to break the law or get unethical in the way they do business, all because they think they have to do that in order to succeed. Not to mention that when you get caught, then the industry gets another black eye because of your actions.-Matt

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Obama Cracks Down on Use of Contractors

The IRS plans to audit 6,000 companies over the next three years in a bid to crack down on companies that erroneously classify employees as independent contractors.

By Courtney Rubin | Feb 18, 2010

President Barack Obama’s proposed 2011 budget suggests tough times ahead for employers who rely heavily on independent contractors in order to keep down labor costs.If the budget is approved, the Internal Revenue Service will add 100 new enforcement personnel as part of a $25 million plan to crack down the misclassification of workers as independent contractors. Though it’s a mere drop in the $3.8 trillion spending plan, it’s expected to more than pay for itself: Obama claims stronger misclassification enforcement will add $7 billion to the federal bank account over 10 years.  The issue is particularly hot when you consider that 50 percent of jobs created during the economic recovery are contingent labor, according to figures from labor law firm Littler Mendelson. Obama’s plan also comes on the heels of several other policies designed to close the $350 billion tax gap the president says is caused by noncompliance with tax law. In November, for example, he issued an executive order to reduce improper payments to contractors by “intensifying efforts to eliminate payment error, waste, fraud and abuse in the major programs administered by the Federal Government.”This month the IRS also began a three-year audit of 6,000 companies (2,000 per year.) And don’t assume the agency is only interested in big targets — unlike routine employment tax audits that often are triggered by questions about company returns, the 6,000 audits are being chosen by statistical sampling — luck of the draw.  And if you aren’t chosen this round, you may be soon. “It’s essentially a recon mission in preparation for a much bigger onslaught, and they’ve said as much,” observed talent management firm MBO Partners’ 1099 Risk Blog.

Estimates are that companies can hold down labor costs by as much as 30 percent if they use independent contractors, because they don’t have to pay Social Security and Medicare taxes, provide vacation or sick leave, pay for workers’ compensation and unemployment compensation insurance, or worry about minimum wage or overtime provisions. (Employers also get a break on potential legal headaches – among other statutes, independent contractors aren’t protected by Title VII of the Civil Rights Act, which prohibits discrimination.) It’s a gamble, though: The price is steep for companies found guilty of misclassification. In 2000, Microsoft had to hand over nearly $100 million in taxes, missed payments, and penalties.On top of the federal legislation, at least half of states are getting tough, too – and again, small companies aren’t immune. New misclassification legislation and stricter enforcement in Illinois, for example, resulted in a $328,500 penalty in December against a Chicago-area housing contractor that failed to keep proper records and tried to pass off 18 workers as contractors instead of employees. The math: civil penalties of $1,500 per day for 218 total days of misclassification plus $1,500 for the poor record-keeping. Similarly, in New York, a 2009 taskforce uncovered 12,300 cases of misclassification, resulting in $6 million in employment taxes and penalties.There’s also increased court scrutiny – and increased potential for lawsuits. MBO Partners estimates that the resulting civil and class action lawsuits could cost businesses an eye-popping $8 million – and that’s per worker.  Warned labor lawyers Brian LaFratta and Joel Rice of Fisher & Phillips: “The heightened governmental attention to these issues will also lead to more private civil lawsuits, as the damages available in such cases make them attractive to plaintiffs’ attorneys.”How to avoid costly mistakes? According to the New York Times, truck drivers, construction workers, home health aides and high-tech engineers top the most-misclassified list. The problem is that there isn’t a universal definition of employee, and what you actually call the person in an employment agreement is irrelevant. The acid test of “employee” versus “contractor” is how much control he or she has over the scope of his or her job, and the person’s exposure to costs and risk. Confused? The IRS has published this information and these 10 tips. Plus there’s even an IRS form (Form SS-8) you can file to get the agency’s advice on the subject.If you think you’ve already erred on the wrong side, it’s better to fix it before the IRS comes calling – and, because penalties can be charged by the day, to fix it sooner rather than later.

Story here.

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Independent Contractor (Self-Employed) or Employee?

 It is critical that you, the business owner, correctly determine whether the individuals providing services are employees or independent contractors. Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.  If you are an independent contractor and hire or subcontract work to others, you will want to review the information in this section to determine whether individuals you hire are independent contractors (subcontractors) or employees.

Before you can determine how to treat payments you make for services, you must first know the business relationship that exists between you and the person performing the services. The person performing the services may be –

• An independent contractor

• An employee (common-law employee)

• A statutory employee

• A statutory nonemployee

In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.

Common Law Rules

Facts that provide evidence of the degree of control and independence fall into three categories:

1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?

2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.

Form SS-8

If, after reviewing the three categories of evidence, it is still unclear whether a worker is an employee or an independent contractor, Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding (PDF) can be filed with the IRS. The form may be filed by either the business or the worker. The IRS will review the facts and circumstances and officially determine the worker’s status.

Be aware that it can take at least six months to get a determination, but a business that continually hires the same types of workers to perform particular services may want to consider filing the Form SS-8 (PDF).

Employment Tax Obligations

Once a determination is made (whether by the business or by the IRS), the next step is filing the appropriate forms and paying the associated taxes.

• Forms and associated taxes for independent contractors

• Forms and associated taxes for employees

Misclassification of Employees

Consequences of Treating an Employee as an Independent ContractorIf you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker (the relief provisions, discussed below, will not apply). See Internal Revenue Code section 3509 for more information.

Relief ProvisionsIf you have a reasonable basis for not treating a worker as an employee, you may be relieved from having to pay employment taxes for that worker. To get this relief, you must file all required federal information returns on a basis consistent with your treatment of the worker. You (or your predecessor) must not have treated any worker holding a substantially similar position as an employee for any periods beginning after 1977. See Publication 1976, Section 530 Employment Tax Relief Requirements (PDF) for more information.

Misclassified Workers Can File Social Security Tax FormWorkers who believe they have been improperly classified as independent contractors by an employer can use Form 8919, Uncollected Social Security and Medicare Tax on Wages to figure and report the employee’s share of uncollected Social Security and Medicare taxes due on their compensation. See the full article Misclassified Workers to File New Social Security Tax Form for more information.

References/Related Topics

• Proper Worker Classification (Audio, Transcript)

• Worker Classification Webcast

• A critical issue for all businesses is properly classifying workers as employees or independent contractors. The IRS’s archived Tax Talk Today Webcast, “What’s Hot in Employment Taxes: Independent Contractor or Employee?,” focuses exclusively on worker classification issues.

• IRS Internal Training:  Employee/Independent Contractor (PDF)

• This manual provides you with the tools to make correct determinations of worker classifications. It discusses facts that may indicate the existence of an independent contractor or an employer-employee relationship.  This training manual is a guide and is not legally binding.

• Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding (PDF)

• Publication 15-A, The Employer’s Supplemental Tax Guide (PDF) has detailed guidance including information for specific industries.

• Publication 15-B, The Employer’s Tax Guide to Fringe Benefits supplements Circular E (Pub. 15), Employer’s Tax Guide, and Publication 15-A, Employer’s Supplemental Tax Guide. It contains specialized and detailed information on the employment tax treatment of fringe benefits.

• Businesses with Employees

• Hiring Employees

• Who Is Considered Self-Employed?

Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.

Link to IRS here.