Here’s a quote from an IRS agent that every small business owner should memorize:
“It’s Easier and Quicker to Audit Smaller Businesses”
You can save as much as 30% on wages by avoiding payroll taxes, unemployment insurance, worker’s compensation coverage, and benefits you may provide regular employees by hiring independent contractors.
Both the IRS and state agencies across the country are concentrating efforts to uncover long-term “temps” who really should be considered employees.
President Obama’s proposed 2011 budget includes funding for 100 additional federal staffers to concentrate solely on finding independent contractors who should be employees. It also would repeal a 32-year-old rule allowing companies in industries ranging from construction to health care to legally classify long-term employees as independent contractors. This seems to indicate that the new test for Independent Contractors may be the longevity of working together, not just the nature of the work.
What’s more, a 2008 initiative linking the computer systems of various agencies makes it easier for the IRS and states to share data on how companies classify employees.
Most of the IRS action on independent-contractor violations will target small businesses and the self-employed, the General Accountability Office reports.
In tough economic times, small businesses are hiring independent contractors because they’re easier to shed if the business starts to falter.
Small Business Audits Up 30%, Big Business Audits Down 33%
The moves come amid what some researchers say is closer overall scrutiny of small and midsize businesses by the IRS. Over the past five years the agency has increased by 30% the hours spent auditing companies with less than $10 million in assets while decreasing by a third the time spent on large-company audits, according to the Transactional Records Access Clearinghouse, a research center at Syracuse University. While the IRS disputes that study’s methodology and says it isn’t targeting small business, some tax experts say such a strategy would make sense.
Another reason why small businesses are likely to be targeted is that they have less resources with which to fight the IRS if they don’t agree with a ruling.
Solution: Don’t avoid using independent contractors. Just make sure that you have all of the proper paperwork you’re going to need.