The next big IRS audit sweep for small businesses is going to be Independent Contractors. You might think that you’re safe from this audit, but think again. If you have Independent Contractors, they are very likely going to find you. Here’s how.
You may be pulled into an Independent Contractor audit if:
- You are part of an industry where others have had misclassified workers,
- A disgruntled IC you let go complains,
- An IC discovers they may pay less tax by turning you in,
- You show Contractor expenses on your return,
- You have low wages compared to the revenue you have, or
- You have a service-industry business.
The IRS is openly soliciting small Schedule C businesses who look like they receive income from only one business to turn the payor in. They are sending out notices to basically ask them if they’re really sure that they are Independent Contractors and not employees. And, by the way, the IRS tells them, if they are employees they won’t have to pay self-employment tax and they will receive benefits.
If the current Health Care Bill does go into law as it’s currently written, then there will be an added push to turn ICs into employees so that businesses are required to pay for health insurance. Your business has to cover employees. It does not have to cover ICs.
You can count on a lot more confusion around this area as time goes on. At the very least, require that (1) your ICs operate through a business structure so you are paying a company and not the IC personally and (2) your IC sign an Independent Contractor Agreement that states that they know they are working as an IC, not an employee.