Amnesty for Independent Contractors vs. Employee Mistakes
For small businesses with employees, the distinction between an independent contractor and an employee may seem negligible. Both work for you and provide some sort of service for which you pay compensation. But there is a difference. If the provider is an independent contractor you just pay a flat fee or rate. If the provider is an employee then you are obligated to withhold federal income and employment taxes on those wages and then render them to the U.S. Treasury.
The distinction between employee vs. independent contractor makes a big difference to the IRS. They usually make the distinction based on the amount of control the business is able to exert over the service provider. It’s not a bright-line test. Even so, the IRS is aggressively pursuing the matter because it estimates that at least 30 percent of businesses misclassify service providers as independent employees when they should have been classified as employees. If there is a misclassification and the IRS discovers it, the business could be subject to substantial penalties and related interest charges for failing to withhold employment taxes.
To help businesses come into compliance with the rules, the IRS has announced a Voluntary Worker Classification Settlement Program. If you are eligible to participate under this program you can get relief from prior employment taxes in exchange for treating the service provider as an employee in future tax periods and paying 10 percent of any past-due employment tax liabilities for the prior year. This will get you out of any interest and penalties and, more importantly, out of a payroll tax audit for the preceding six years.
If you are paying service providers and are uncertain as to whether they should have been treated as employees or independent contracts and need to assess your tax options, then schedule your free consultation by calling (480) 888-7111 or submit a web request here.