Many people in the workplace today are independent consultants – meaning that they work for another person or company according to his or her own processes – they are only subject to what is agreed upon for a specific job. Many enjoy being independent because they can work across many different industries for various companies. Also, employers like to hire them because they can come in, get the job done and most often have a multitude of experience from their past work history.
While having consultants working for your company is a great thing, there is a major factor of their employment that many companies over look …
The IRS estimates that the difference between what taxpayers owe and what is paid is around $350 billion annually. Of that, they believe that over 10%, or nearly $40 billion, is owed by independent contractors and small businesses. With growing deficits and the current legislative climate, the IRS views this as a significant opportunity. Because it is difficult to track down and collect from millions of delinquent taxpayers, the IRS has opted to pursue those with the deepest pockets: corporations.
How? You may not know it, but, each January your company’s accounting office distributes a 1099 form to every independent contractor your company engaged over the prior year. And who get’s a duplicate copy? You guessed it…the IRS. That 1099 form flags your company and can trigger an audit of your contracting and employment practices. These audits are in addition to the 5000 random audits the IRS recently announced plans to perform over the next three years. Even if your firm isn’t on the Fortune 1000 list, the odds are that you will be audited at some point in the near future.
What the IRS is looking for is what they call “misclassification” and they have hired thousands of auditors in recent years to uncover it. The issue is whether the worker should have been classified as an employee and had income and payroll taxes withheld and paid for. You may think that because this worker is not actually on your payroll that they would not be considered an employee, but, the IRS may disagree.
So what can you do to make sure you and your independent consultant(s) are covered in case of an IRS audit?
Below are a few suggestions:
- Assess your current processes and practices for utilizing independent contractors and perform a census of all contract labor working for your firm.
- Consider assigning responsibility for engaging independent contractors to legal or supply chain management or engage a third-party supplier such as Synergis Workforce Solutions to oversee compliance.
- Review independent contractor agreements and ensure they meet the statutory tests and clearly define the independent contractor relationship and division of duties.
- Consider instituting term limits when engaging an independent contractor.
- Consider utilizing a third party Payroll Service for Contingent Workers rather than engaging independent contractors directly.