New Crackdown on Employment Taxes

The IRS announced that it has teamed up with 29 states (with others joining soon) to crack down on employment tax violations. The primary focus is on which workers should be treated as independent contractors and which should be classified as employees. These agreements are part of the IRS’s Questionable Employment Tax Practice (QETP) initiative, which will provide a centralized, uniform means for the IRS and state employment affairs to exchange data, thereby leveraging resources and encouraging businesses to comply with federal and state employment tax requirements.

Caution: It is a common misconception that someone working part-time or earning less than $600 per year should be classified as an independent contractor. In fact, part-time status and the number of hours worked are generally not factors that determine whether a worker is an employee or independent contractor. Determining the correct result can be very tricky. Usually the outcome depends on control. If the business has control over its workers to such an extent that it can control what will be done and how it will be done, that generally means that the workers are employees, and payroll taxes and worker’s compensation must be paid by the employer.

Warning: If a company is treating a person as an independent contractor, but that person believes they are an employee, that worker can file Form 8919, Uncollected Social Security and Medicare Tax on Wages, with the IRS. In this case, the worker only has to pay the employee’s share of employment taxes; however, if the company is treating this worker’s payroll improperly, it is responsible for the employer’s share of the taxes, plus penalty. Employers can also get in trouble if an independent contractor files for unemployment, telling the state that he or she believes they are an employee. In that case, a state could share such information with the IRS, indicating that the contractor might, in fact, be an employee.

Note: Employers think they save money by treating people as independent contractors, but beware. If an independent contractor gets hurt on the job, he or she is not covered by worker’s compensation. The company could be on the hook for a major legal liability. The general consensus is that treating someone as an employee is generally safer, for a whole host of reasons.

Determining worker status and filing and paying employment taxes can be a complex process. If you are a business owner who needs assistance, you should immediately call to discuss your particular situation.

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