Heads up: IRS audit blitz headed your way
October 7, 2009 by Christian SchappelPosted in: In this week's e-newsletter - benefits, Latest News & Views, Pay and benefits
Even if you think the Internal Revenue Service would never come knocking on your company’s door, you might want to prepare as if it would. Why?
The IRS just announced it will launch a major employment tax audit initiative.
It’s planning 6,000 random audits in the next three years, starting this November.
3 areas to check
As for which bases you want covered, there are three specific targets the IRS has identified:
- employee fringe benefits
- executive pay, and
- independent contractor classifications.
You still have a few months before the audits begin.
Now’s the time to make sure your company is not only in compliance, but has the proper paper trail to support all decisions.
It couldn’t hurt to perform a “mock audit” of these areas to see if your company’s vulnerable.
That can save you from having to open your wallet too wide if the IRS does pay you a visit.
Tags: executive pay, fringe benefits, independent contractor, internal revenue service, IRS, tax audit initiative
October 15th, 2009 at 3:01 pm
What are the penalties if you have employees that have been paid as IC with 1099’s? Does anyone know?
October 15th, 2009 at 5:22 pm
Cheryl, it has less to do with whether or not they get a 1099 (because that just takes care of income tax and not payroll and labor taxes) than whether they meet certain requirements as truly being “independent”. For example…do they use your equipment and facilities? Do you closely dictate how they get their work done…not just that it gets done? Do they have to work set hours? If you are treating them like all of your direct employees but paying them as an IC you could get dinged. The IRS has a publication (Pub 1779) that outlines the test for IC status. There is also a form…Form SS-8. Or if you are a member of SHRM or a payroll organization they should be able to provide the questions you should be asking.
October 16th, 2009 at 11:18 am
Thanks Melissa. I am familiar with the reguirements and regulations regarding the difference between an IC and a employee. I was just wondering what the IRS does when it determines you have been paying an employee as an IC. What does the fine involve, what, if any, taxes are due from the employer, is anything due from employee who has been filing as an IC using a 1099 etc. ?
October 26th, 2009 at 3:01 pm
Cheryl,
In past audits I have seen where the IRS charges the following:
Social Secuirty – Both the Employer and Employee portion
Medicare – Both the Employer and Employee portion
Federal Income Tax – Usually a flat rate like 20%
State Income Tax – Sometimes they will also charge a flat rate for state taxes as well.
In worse case, they will treat the amount you paid you employee (formerly known as your independent contractor) as the net check and then you have to gross up the check to cover the taxes listed above. For a $1,000 payment to an I/C you could end up paying something like an additonal $600 or so.
Sometimes you can offset the amount you have to pay if it can be shown that the I/C reported the income and paid SE and Income Taxes on this amount.
Best Bet is to have a solid case on your I/C’s and in our Company’s case, when in doubt, we pay as an employer.