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
- 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.