Worker Classification Audits
The misclassification of workers is costing the government billions in back taxes from uncollected Social Security taxes, Medicare Taxes, Federal unemployment taxes, and Federal income taxes. To ensure that business owners are not misclassifying their workers, the IRS began aggressively conducting worker classification audits. A worker classification audit is when an IRS agent reviews if a business is properly categorizing its workers.
Employee VS Independent Contractor | 1099 Forms
Typically, workers fall into one of two categories. Either a worker is an employee or an independent contractor (IC). Each category creates its own set of tax obligations. ICs are self-employed individuals who contract with a business. A business that treats its worker as an IC does not withhold any taxes from their workers’ salaries. At the end of the year, if the business paid the independent contractor more than $600.00, then the worker is issued a Form 1099-MISC. It is up to the self-employed, independent contractor to properly withhold and pay taxes at years’ end.
Businesses that treat their workers as employees are required to withhold Social Security, Medicare, and federal income taxes from their workers’ salaries as well as pay the employer’s share of these taxes. Employers are also responsible for paying Federal unemployment taxes for their employees. There are also non-tax responsibilities such as providing employee benefits and observing certain employee rights during employment. At years’ end, the employer issues a Form W-2 and to the worker and submits the Form W-3 to the social security administration.
According to Treasury Inspector General for Tax Administration (TIGTA), the misclassification of employees as independent contractors is an epidemic that is exacerbating the Tax Gap. Misclassifying workers can cost a business significant state and federal back taxes.
Read more in this IRS pamphlet.
At the Law Office of Todd S. Unger, Esq. LLC, we have experience in analyzing the statutory framework and case law to assist you in defending against a worker classification audit. Contact the Law Offices of Todd S. Unger, Esq. LLC today for a confidential consultation (877) 544-4743.