Posted On June 22, 2012

Independent contractor or employee? IRS audits take a close look

In the recent economic downturn, many businesses are looking for ways to save money. For some, restructuring the way they classify their staffing can bring significant savings to the bottom line. In certain lines of work, the distinction between hiring an employee versus an independent contractor can make a big difference in staffing costs. However, business owners in Nevada and elsewhere should be aware that the Internal Revenue Service is turning its attention to the practice through increased audits and is cracking down on misclassification of workers. It is important to know the rules and ensure that your company is in compliance in the event that you are selected for an audit by the IRS.

Auditors will be looking for several signs that your staffing may not be in compliance with the tax code. One red flag is a situation in which a former employee is quickly rehired by the company to perform the same basic functions, but now as an independent contractor. Another area of concern is when a company uses the same “strategic alliances” to meet their staffing needs.

The line between employee and independent contractor is not particularly clear, which can lead to confusion. In a general sense, an independent contractor is hired to complete work for a company largely without supervision. They usually provide services that differ from those offered by the company they are contracting for. They also work independently, with little or no need to adhere to the policies and procedures in place for company employees. As a result, they usually do not enjoy the full range of benefits offered to employees, which is one way that using independent contractors saves money for the company.

Because the guidelines are not well-defined, IRS auditors must evaluate each case individually, and make independent determinations about the nature of each worker’s association with the company. If the auditor determines that an employee has been misclassified by the business owner, he or she can absolve the company from assessed penalties if it is believed that the business truly thought it was correctly classifying the employee. For Nevada business owners, the best time to evaluate your company’s compliance with the IRS tax code is before you face audits.

Source: Fox Business, “What Auditors Look for: Independent Contractor vs Employee,” Bonnie Lee, June 8, 2012