IRS Cracking Down on Independent Contractors

IRS Cracking Down on Independent Contractors

Watch out 1099’ers! The IRS is searching for independent contractors that should be classified as temporary workers. The government is closely monitoring your 1099 filing, in search of additional revenue for the State and Federal governments taxing body. According to the IRS and the Department of Labor, a vast majority of today’s 1099 workers do not merit the requirements that determine what qualifies them as an independent contractor.

With fines as much as $15,000 for an employer that wrongly classifies a 1099 worker in California, where new legislation has been passed, companies are beginning to change some of their former independent contractors into temporary workers. And, if the government determines that a company has falsely classified an employee, fines are up to $25,000 per incident.

The criteria for an independent contractor filing a 1099 is that the owner of the business hiring them can direct or control the final result of the work provided, but not the means or methods of accomplishing the result. In contrast, with a temporary employee, a company has the right to directly control the work being done through instruction, training or other means. This rule could change many 1099’ers into temporary employees, especially in the entertainment industry.

To determine if a worker should be classified as an independent contractor or as a temporary worker, employers can ask the IRS to make this determination for them by filing the SS-8 form to see if they should be holding back taxes. This could greatly affect all of us who work as independent contractors and run our expenses through our company.

I have been working as an independent contractor for over ten years; filing many 1099 forms. Solidly entrenched as a 1099-er, I became concerned when I recently filed my taxes this month. I received the dreaded letter from the IRS. Afraid to open it, I stared at it for two days, afraid I was being audited! I thought to myself, I did everything right and used a qualified accountant. Why am I getting audited? Was I missing something?

My heart pounded as I opened up the envelop from the IRS. Fortunately, it wasn’t a call for an audit, but rather a note saying that I owed $195 in late fees. I am still not sure why they sent this to me since I have always paid on time. Yet, I do believe that this was a warning for me as a 1099-er. The government is closely watching over us.

My advice is to make sure you check with your employer and accountant to determine whether you really are an independent contractor or if you should be classified as a temporary worker. Make sure you are proactive and pay your taxes properly. The last thing a 1099-er needs is an audit!

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  • Another revenue grab. The IRS will collect fines and taxes from the 1099 issuer, even though the contractor has already paid the taxes.

    Long live the Leviathan!

  • Basically what Richard points out is the confusing part of your piece.

    The problem belongs to the putative employer who is classifying employees (using the 20 step test) as independent contractors, for not withholding taxes, and not paying the employer's share of FICA.

    If you (like me) am an independent contractor, it doesn't affect you, so long as you fill out your tax forms properly (including Schedules C and SE) and your stated business receipts come close to what the 1099s say, in case they are matched.

    I also received the first year I was an independent contractor the notice that I owed a late payment penalty because the estimated tax I paid was not equal for all 4 quarters. However, the IRS admitted that they lost my Form 2220, and when I resubmitted it, I got a $5 refund. I also got one from the dummies at the state Dept. of Revenue, even though I had overpaid, and sent them a 2220, too.

    But let me make it clear--IRS is going after the senders of 1099s, not the recipients, in this campaign, which is not new.

    However, to disagree with Richard, if it occurs as he says, the IRS should be giving the self-employed person a refund. It will though, keep the penalties against the employer.

  • In reply to jack:

    I did not say that the contractor should be given a refund, though it is only right I'm saying that the IRS will collect twice.

  • In reply to Richard Davis:

    You might not have said it, but I did.

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    If you are having trouble or doubts on a classification of employee vs independent contractor, be sure to check out www.icsimplify.com. They have a free tool which after answering some questions about your project they give you a risk of misclassification based on your responses.

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