Your Taxes: Independent Contractor vs. Employee? Know the Law
The new Health Care Act could give the government an additional incentive to make businesses reclassify independent contractors as employees. State unemployment departments may already be the great enforcers and deciders in this debate. We at Criser, Gough and Parrish believe that this is an area of concern to our clients. Small businesses need to be aware.
The question of whether an individual is working as an independent contractor or an employee is not a new one. A study in 1996 showed that between 1988 and 1996, 90 percent of court cases challenging independent contractor status resulted in the IRS classifying the workers as employees, not contractors, forcing taxpayers to come up with over $751 million in back taxes and penalties.
Shortly after these findings were released, President Clinton signed the Small Business Job Protection Act so that the burden of proof resided with the IRS, meaning the IRS had to prove that someone was an employee, rather than the employer having to come up with proof that a worker was truly an independent contractor. Business owners at that time could take a few steps to set up an independent contractor properly, such as having a written agreement, denying any fringe benefits and getting the contractor to set up their own business, and they could sleep well at night knowing they were most likely in the clear.
While the question of independent contractor vs. employee hasn’t completely gone away, it hasn’t received much attention since that time. But times have changed. With the federal government and states on the hunt for additional tax revenues to help cover growing deficits, both levels of government are on the lookout for ways to collect more taxes, and this seems to be their latest solution.
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