The IRS has launched a program to allow employers to reclassify the status of their independent contractors who should be employees giving employers a break in paying past payroll taxes.
The upside? In the past, IRS could review past records for the independent contractor and collect unpaid payroll taxes (FICA. FUTA and Medicare) and penalties going back years. Now the program gives employers an opportunity to pay a smaller payment than owed in an audit.
The downside? Potentially more vigilant awareness of your business by federal and state agencies. Other state agencies (not involved with this program) could potentially audit you to collect back-payments for unemployment program contributions and workers compensation programs.
For information about this program, please visit: http://www.irs.gov/newsroom/article/0,,id=246203,00.html
Work closely with your attorney and human resource expert to determine if this is the best course of action.
What can happen if you continue to classify the worker incorrectly?
There are a variety of penalties and cost could range from 15% to over 40% of worker compensation for the period as well as penalties for not collecting social security payments.
TheIRSlooks to see if you intentionally misclassified workers in order to avoid certain levels compensation from being considered in retirement plan contributions. This could result in your retirement plan losing its tax qualified status.
And as mentioned above, other state agencies could audit you and collect back payments for programs.
How can you determine if you have an independent contractor or employee?
The IRS provides information on how to determine this at: http://www.irs.gov/businesses/small/article/0,,id=99921,00.html
You should also consult with your attorney and human resource expert.
For more information on determining whether or not you need to hire an independent contractor or an employee, please see the July/August 2009 Practice Management Solutions Magazine article “Independent Contractor or Employee?”
Mary Dunlap, CFP®
Mary Dunlap Consulting