Risks of Non-Compliance
The IRS has established a guideline of twenty questions for employers to determine whether their temporary employee is qualified to be classified as a 1099 Independent Contractor or would be more appropriately classified as a W-2 Temporary Contract Employee. The difference in classification has repercussions for both employer and contractor; the employer, however, runs the greatest risk from fines and back taxes should a misclassification be determined in an IRS or state audit.When a professional contractor submits documentation to support a tax return Red Flags may be detected during processing of data. The IRS may quickly arrive on the employer's doorstep to implement a non-compliance audit. Inconsistencies frequently trigger full-scale audits.
Although an audit may not occur during the contract period, the facts and circumstances of that contract exist and may arise in an IRS or state audit years later. The IRS will actively search for any inappropriate classification during such an audit.
Even though the contractor may have been responsible for a self-classification that later incurred an unfavorable judgement in a compliance audit, it is not the contractor that is at risk. If a 1099 contractor is reclassified from an independent contractor to an employee due to an IRS or state employment tax audit it is usually because the hiring company has been audited and that hiring company is then assessed with the withholding taxes, penalties etc.
Contracts and Incorporation are no protection
Reliance on written contracts with 1099 wage earners that claim their independence from the company is a common and costly error. In reality the onus is on the company to prove the 1099s are independent. The tax authorities will demand evidence of their independence regardless of the existence of a written contract. A written contract is still a requirement for appointment of 1099 contractors but is no protection in an audit and is in this context worthless. Having independent contractors incorporate is also not a guaranteed protection. The IRS will closely investigate the corporation. An unfavorable determination may result, especially if it appears the sole purpose of the corporation was to reduce tax obligation (they usually are). In this case 1099s would be reclassified as employees.Huge Corporate Penalties may be incurred
Estimates from the State Bar of California's publications show that fines per contractor (who earn $60/hour; or $120K/per year) may come to $30,000 per year if the IRS determines that the misclassification was unintentional. If, however, intentional misclassification is determined, fines may run up to $63,000 per year for as many years as the contractor was employed. This figure multiplied by numerous contractors over several years obviously could result in a considerable financial liability for any corporation. Fines, penalties and interest from both state and IRS authorities may amount to huge sums . The IRS is reporting finding misclassified contractors in more than 90% of companies audited. Sun Microsystems, IBM and Microsoft have all been assessed with fines in some instances exceeding 10 million. In addition to fines, potential disqualification of retirement and fringe benefit plans may result. Even small firms are under scrutiny.Passthru&: The Solution
Chancellor & Chancellor will perform a "clean-sweep" company-wide. The entire company will be brought into complete compliance using the full resources of our team of leading attorneys and employment law specialists. Sound practices will be established that will safeguard your company from the undue attention of tax authorities, as audit "Red Flags" will have been carefully eliminated. Moving forward, uninterrupted compliance will be assured by regular monitoring for concordance with changing legislation. Should the worst happen and an IRS/State audit be instigated, post-Chancellor- proprietary-audit operations will stand-up to the most stringent evaluation. For the period preceding a Chancellor proprietary audit, evidence suggests that the Chancellor initiative will serve to mitigate penalties, provide negotiation leverage, and is overall a valuable bargaining chip when dealing with an IRS/State audit.
Home • Passthru® Enterprise • Passthru® Contractors • Benefits • Passthru® •
Payroll/Billing Information • Compliance and Risks • Resources for Contractors • Contacts
Copyright Chancellor & Chancellor, Inc.