The Internal Revenue Service has announced its plans to conduct payroll tax audits of approximately 6,000 companies over the next three years, with a specific goal of focusing on compliance issues and proper classification for independent contractors.
Companies that use independent contractors should assess whether those workers actually qualify as such, as the classification directly impacts tax withholding or the lack thereof.
The U.S. Department of Labor estimates 30 percent of employers misclassify workers. President Obama’s fiscal 2011 budget, released on Feb. 1, stipulated funds for investigations by the Department of Labor and the Treasury Department, with the objective to acquire up to $7 billion in unpaid employment taxes during the next 10 years.
For many types of businesses, it is not uncommon to hire an independent contractor during periods of increased demand for services. When additional help is needed, a company must analyze various factors in deciding whether to hire either an independent contractor or a regular team member.
Employee additionsHiring a full- or part-time associate may make sense due to the training time needed for an individual to reach appropriate levels of productivity.
Hiring an employee means there’s little doubt that help will be available when clients need it, resulting in faster turnaround time and increased customer satisfaction.
Clients recognize company employees. Also, customer service issues due to work quality or missed deadlines will be minimal. In time, the employee will be very familiar with each customer account, which can help with customer retention.
An employee will, ideally, know the inner workings of the company, and the outcome will be a consistent application of policies and procedures. The definition of billable and nonbillable work will be clear. Time that should be billed to a client will be invoiced, which could help maximize revenue, as invoices can prevent improper billing.
Independent contractor benefitsFor some companies, however, there may be times when using an independent contractor is more beneficial than hiring additional staff.
The cost of fixed overhead is not increased since there is no permanent salary to pay on a regular basis, and the individual will not be offered any benefits such as vacation, sick pay and health insurance. Significant savings will be realized since the cost of an average employee benefit package is estimated to be 32 percent of an individual’s yearly salary. Employee taxes do not have to be paid. These taxes consist of items such as federal income tax, federal unemployment tax and relevant state taxes. Since contract employees may be familiar with a wide range of industries and businesses, they might provide a broad spectrum of insight and knowledge that a regular worker will be unable to due to a lack of exposure.
Once a company has determined that an independent contractor would be the best answer to work-force needs, it’s important to analyze whether an individual being classified as an independent contractor actually is one.
Consider whether the independent contractor:
• works for multiple companies;
• incurs personal loss when work is not performed up to the hiring company’s standards;
• has the ability to decide the manner and method in which the work will be executed; and
• is responsible for providing the necessary tools and equipment to carry out the job.
Assessing and making good-faith adjustments in independent contractor classifications now may result in easier IRS audits in the future.
Lynne Haggerman, M.S., is president/owner of Lynne Haggerman & Associates LLC, a Springfield firm specializing in management training, retained search, outplacement and human resource consulting. She can be reached at lynne@lynnehaggerman.com.
