by Brian Mahany
Many small businesses use independent contractors to fill a wide variety of part time and specialized positions. Less paperwork, no withholding and much easier to hire and fire. While that might sound like an ideal solution, the IRS and Department of Labor have other ideas. A recent American Bar Association article said some estimate the number of independent contractors in the workforce as high as 30% or more!
The Treasury Inspector General for Tax Administration says that misclassified workers cost the government $54 billion in unpaid employment taxes and an additional $15 billion in social security taxes each year. If you think that’s a lot of money for Uncle Sam to leave uncollected, you are right.
President Obama wants the IRS to beef up enforcement of misclassified workers and is adding both personnel and tens of millions of dollars into finding companies that misclassify their workforce.
Trying to determine whether a worker is an employee or a contractor is no easy task. Unfortunately there are different rules making someone potentially an employee and a contractor depending on whether the classification is for taxes, social security, unemployment or workers compensation.
Because a worker miscategorized as a contractor might stand to make more money or receive benefits, complaints from workers are common. Note that under the new whistleblower rules, disgruntled workers now have a financial incentive to turn in their employer and can do so anonymously.
While this sounds doom and gloom, independent contractors still play a valuable role in small businesses. Make sure you have a lawyer or accountant help you with structuring the work and the position. A little time and thought up front could save tens of thousands of dollars later.
We recently represented a small agricultural business that was assessed millions of dollars in large part because workers were considered employees by the IRS. Ultimately we were able to successfully resolve the case in tax court, although not every taxpayer is so lucky.
Congress is currently considering record keeping legislation that will require business owners to keep detailed records on their workers. Get ahead of the curve and make sure you are in compliance before you receive an audit notice.
For more information, contact attorney Brian Mahany at (414) 704-6731 or by email at All calls are completely confidential. Our team of tax lawyers have helped taxpayers across the U.S. – from offshore tax compliance to audit defense, we can help.
Mahany & Ertl, LLC – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine & San Francisco, California. Services nationwide.