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Are You Classifying Your
Workers Properly?
One of the steps we recommend to
clients who use independent contractors, and who
therefore face a heightened risk of a costly IRS
payroll tax or benefits audit, is a quick review of
some of the key things the IRS tells its agents to
look at in determining whether a worker is really an
employee.
Caution: In an effort to close the tax
gap, which is the difference between the amount of money
that should be reported and collected and the amount of
money that the IRS is actually receiving, the IRS is
targeting worker classification practices. IRS officials
had indicated that worker classification cases will be a
major area of emphasis in 2008, and auditors are
expected to take a tougher stance if a business has too
much control over workers to justify independent
contractor status. The IRS will use leads from workers
who, beginning with the filing of their 2007 individual
returns, can attach a special form (Form 8919 -
Uncollected Social Security and Medicare Tax on Wages)
to their Form 1040 if the workers think they have been
misclassified. The IRS will also use information from
data-sharing agreements that it has entered into with 29
state workforce agencies to share the results of
employment tax examinations in an effort to deter
misclassification of workers.
The primary inquiries fall into three
categories. Who has financial control of the job? Who
can exercise control over how the worker performs the
specific task? And how do the parties themselves view
the relationship? When reviewing the checklist, keep in
mind that the IRS will make its decision based on the
whole picture, not just a single factor.
Workers are more likely to be
classified as independent contractors if they:
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Make a significant investment in
business property (a home computer is not
significant)
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Pay their own business expenses
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Receive a flat fee that is not
based on an hourly or similar rate
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Are not prohibited from doing work
for other companies
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Can pay subcontractors to get the
job done
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Are not performing services as an
integral part of your regular business
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Have a contract with an
enforceable liquidated damages provision
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Can make a profit
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Can suffer a loss
Workers are more likely
to be classified as employees if they:
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Are given specific instructions
and on-going training in how to get the work done
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Cannot work for others
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Have expenses paid by your company
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Are paid with a salary or hourly
wage
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Do not have a significant
investment in their trade or business
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Are an integral part of your
regular business
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Receive direct reimbursement for
all, or almost all, expenses
Less important is:
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Whether or not the work is
performed on the business's premises
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Whether the worker has flexibility
in setting hours
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Whether the relationship is
temporary or short-term
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Whether the work is full- or
part-time
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Whether the worker performs
services for one or more businesses
If you suspect you may have an issue, we
would be happy to help you evaluate your hiring
practices and suggest effective solutions, if necessary.
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Simple.
Convenient. Smart.
Complete Payroll, Inc.
380 N. Terra Cotta Rd
Suite D
Crystal Lake, IL 60012
815.788.2932
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