May-June, 2011 Tax Tips and News
Workers Classification Audits Remain a Hot Topic – Be Prepared!
I have discussed this topic several times in the past, but it is important enough to take another look. Why? Because the IRS and most states continue to aggressively pursue what is believed to be an area of much tax abuse and, therefore, can provide much needed fuel to their starving treasuries.
By classifying workers as independent contractors a business can trim as much as 30% from its payroll by avoiding unemployment insurance and workers’ compensation payments as well as the employer’s share of social security and Medicare taxes.
The big issue is “who controls the worker”. To arrive at the answer, the courts have historically applied a 20 factor test in determining the issue of control. The courts assign weights to the factors on a case by case basis depending upon each factor’s perceived relevance. Courts have decided cases where just a few of the 20 factors have been so overwhelmingly dominant as to control the decision. The 20 factors address three elements: behavioral control, nature of the relationship, and the financial relationship that exists. In order for a worker to be classified as an independent contractor, the IRS expects the business owner to have very little, if any, behavioral and financial control over the worker.
The IRS auditors are required to take special audit training classes if they are to be assigned to the worker classification audits. Know that they have been well trained and are highly motivated. If you or your company should become involved in this type of audit the best advice is to be prepared in advance.
Necessary tools in your arsenal include a job description for the position that reflects very little control and an independent (non-office) environment, a signed independent contractor’s agreement between the company and the worker, a completed Form W-9 (Request for Taxpayer ID Number and Certification) from each independent contractor, and ensuring that the company’s employment policies treat the position as an independent contractor.
The IRS manual dealing with worker classification instructs the auditor to examine the degree of control exercised by the owner over the worker’s performance of his duties, whether the worker has an investment in his tools and other property, whether the worker has the possibility of losing money in the engagement, whether the worker can be laid off or discharged, the permanency of the relationship, and the intent of the parties. Having this information in advance should be very helpful in defending against an IRS attack.
It would be very prudent to consider engaging professional assistance should a worker’s classification audit arise.
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