Today’s article is an important one. I would ask my readers to consider it carefully, especially small businesses, and then I ask that you meet with your tax advisors to discuss how to deal with these issues now.
Today the IRS is engaging in a massive effort to reclassify independent workers to employee status. This affects many businesses and may create extreme financial risk. Here’s why.
Most businesses have regular employees. On each pay day the business withholds their taxes and pays that amount over to the IRS. At the end of the year the employees get a form W-2 reflecting those withholding taxes, social security taxes, etc.
Most businesses also have a number of independent contractor workers. These workers are paid differently. They are paid a gross amount and THEY are responsible for making their own tax deposits to the IRS. A classic example of independent workers are construction workers, subcontractors, architects, etc. At the end of the year the business sends them a Form 1099 (with no withholdings).
The IRS obviously prefers to collect income taxes from one source, the employer. As for W-2 employees it is doing so. As for the Form 1099 workers, however, the IRS must collect their income taxes from each worker individually. The Internal Revenue Service considers this to be an administrative burden. It can also can result in reduced collections as the workers have often spent their money instead of making their estimated tax deposits.
To cure this administrative burden and to increase collections, the IRS is undertaking a massive effort to reclassify many Form 1099 workers to W-2 employee status. And it is doing so retroactively – making the employer go back as many as three years and requiring it to pay all of the independent contractor’s taxes, plus adding penalties and interest, even if the worker has already paid those taxes (more on this later). The IRS has stated it wants to instill fear in employers who may have these financial risks so that they start reclassifying their own workers in the future – a deliberate effort to create compliance through fear and intimidation.
It gets worse.
The IRS often shares its reclassification information with other federal and state agencies. As a result, the Texas Workforce Commission may audit you and reclassify your workers for state unemployment tax purposes. Also, the US Department of Labor may reclassify the worker, which is a huge risk especially considering the overtime rules – which are expected to increase dramatically in a few months. These reclassifications can also affect related issues such as immigration requirements, worker’s compensation liabilities, federal and state discrimination laws, etc. And all of this can be caused by one disgruntled worker who files for unemployment with the state and claims he should have been treated as an employee.
Over the next few weeks I’m going to write a four-part series on these new rules and the terrible risks they hold for unprepared businesses. If you want more detailed information, Diana Valdez (Attorney) and Steve Haskins (Employee leasing) are going to be holding a series of public seminars on these issues that may be helpful.
Folks, I think this is a big deal, a huge financial risk for the business and for those of us who can become personally liable for some of these risks. However, these risks can be reliably handled but only if addressed early.
Please don’t be a victim. Get on this right now.