We’ve been talking for a few years about the problem with Independent Contractor (IC) vs. Employee issues.
The IRS wants to try to prove that your ICs are really employees. It means more payroll tax from you. You want your ICs to be ICs because it means less payroll tax and benefits. And, if your ICs are savvy taxpayers, they know that they pay less tax too because they get business deductions. No wonder the IRS wants to turn ICs into employees.
A recent court case (Rosenfeld) brought up another problem when the IRS turned an IC into an employee. In this case, the IC was reclassified as an employee. The IC had put a SEP pension plan in place. Now, as an employee, he wasn’t entitled to have a SEP. So, not only did it get disallowed and he had to pay more taxes, he also had to pay a 10% penalty because he made an excess contribution to the pension plan. Or rather, he should have paid a 10% penalty, but the IRS agent made a mistake and only charged him 6%.
Bottomline: If you are an Independent Contractor, make sure you’re in compliance with the IRS requirements and that you will be Winning the Independent Contractor Argument. If you hire Independent Contractors, same thing. Don’t lose this battle!