Alert: Feds and states take steps to reduce use of ICs
November 18, 2009 by Jim GiulianoPosted in: Employment law, Hiring, In this week's e-newsletter
If your company is considering broader use of independent contractors to save money, be aware that federal and state lawmakers and investigators plan to go hard on any employer who doesn’t meet strict IC requirements.
ICs generally mean a good deal for employers, including savings on:
- federal and state income tax withholdings,
- unemployment insurance
- workers compensation
- benefits,
- overtime, vacation and sick pay, and
- no union eligibility.
A budget-squeezed employer has to love the idea. Here’s the problem: Federal and state governments are getting squeezed, too, in today’s economy, and they see questionable use of ICs as one of the sources of the squeeze, since the practice generally results in lower tax revenue.
One study by the General Accountability Office, says misuse of ICs lowers income tax revenues by about $4.7 billion annually. And the University of Missouri–Kansas City Department of Economics estimates that from 2001 through 2005, Illinois lost $124.7 million a year in income taxes as a result of IC misclassification by employers.
You probably can figure out what’s coming.
In August, Congress began reviewing several bills that tighten restrictions on the use of ICs and exact tougher penalties on employers who bend the rules.
Further, states such as Illinois, Massachusetts, New Hampshire, New Jersey and New Mexico already have enacted new laws targeting IC misclassification. The IRS recently announced plans to audit more than 6,000 randomly selected businesses in the next three years to, among other goals, curtail IC abuse and its effect on tax revenues.
That’s a double-whammy, since state and federal governments share info on violations: Get caught by one and you’ll probably pay both.
Tags: independent contractor, IRS
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November 23rd, 2009 at 11:47 am
So, what constitutes a misuse?
November 23rd, 2009 at 3:07 pm
From the IRS website:
Topic 762 – Independent Contractor vs. Employee
To determine whether a worker is an independent contractor or an employee under common law, you must examine the relationship between the worker and the business. All evidence of control and independence in this relationship should be considered. The facts that provide this evidence fall into three categories – Behavioral Control, Financial Control, and the Type of Relationship itself.
Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training, or other means.
Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job. This includes:
The extent to which the worker has unreimbursed business expenses
The extent of the worker’s investment in the facilities used in performing services
The extent to which the worker makes his or her services available to the relevant market
How the business pays the worker, and
The extent to which the worker can realize a profit or incur a loss
Type of Relationship covers facts that show how the parties perceive their relationship. This includes:
Written contracts describing the relationship the parties intended to create
The extent to which the worker is available to perform services for other, similar businesses
Whether the business provides the worker with employee–type benefits, such as insurance, a pension plan, vacation pay, or sick pay
The permanency of the relationship, and
The extent to which services performed by the worker are a key aspect of the regular business of the company
For more information, refer to Publication 15-A (PDF), Employer’s Supplemental Tax Guide, or Publication 1779 (PDF), Independent Contractor or Employee. If you want the IRS to determine whether a specific individual is an independent contractor or an employee, file Form SS-8 (PDF), Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.
November 30th, 2009 at 8:40 pm
SICK ‘EM Big Brother!
Doesn’t this mean we can have our illegal aliens come back as long as we classify them as “IC’s”?
December 1st, 2009 at 10:00 am
Jackie, are you serious. Please say no. Illegals are still illegal no matter how you pay them. An employer has to collect social security numbers even for ICs. You are still responsible if you knowingly and willingly employ an illegal
December 1st, 2009 at 11:11 am
No, I wasn’t serious. But with the econonmy as it, many employers who laid their employees off, hired them back as Independent Contractors. those people may as well have been illegals,…they were getting the same treatment.