New tax form may raise the red flag for your company: A new IRS
form should cause widespread concern among employers. Designed to help individuals avoid
paying self-employment tax on income that should have been reported to them as wages, the
“back door” intent of the form may really be to catch employers who are not treating workers as
employees. Unfortunately, the form can also be used to bring audits and time-consuming
inquiries upon innocent businesses by disgruntled individuals.
Here’s why companies should be concerned: The form gives the taxpayer
several options to specify why income reported to them as nonemployee compensation (on Form
1099) should instead have been shown as wage (W-2) income. The taxpayer is required to name
the employer, provide the company’s EIN, and specify the reason the income should have been
reported on form W-2. Among the choices are (1) I was previously treated as an employee by this
firm, and (2) my co-workers, working for this firm, are treated as employees. The taxpayer does
not have to submit any form of proof to back their claim. But - you can bet that the IRS will be
quick to launch an investigation against your business if you are listed on one of these forms.
And the onus will be on the employer to show why their reporting was correct, and the taxpayer
was wrong. Guess whose side the IRS will be on!
The majority of companies make a good faith effort to attempt to classify their workers correctly,
either as employees or independent contractors. However, a number of businesses, including
large firms such as Federal Express, IBM, and Coca Cola, have made attempts to treat some
workers as independent contractors. This is basically a cost-saving move, as companies can
avoid employer FICA, Federal and state unemployment taxes, workmen’s compensation, and
employee fringe benefits. The temptation is there to attempt to move more employees to
independent contractor status.
Businesses beware! The IRS has announced a campaign to aggressively seek out
businesses that are improperly classifying workers as independent contractors. This
new form, “Form 8919 – Uncollected Social Security and Medicare Tax on Wages,” is but one
weapon in this campaign. Workers are filing class-action lawsuits in other cases. Employers must
be absolutely certain their reporting treatment is correct. Not only will employers be assessed for
uncollected payroll taxes, interest and penalties, but insurance companies may file claims for
unreported employees for workmen’s compensation and medical insurance premiums. In addition,
failure to include workers as employees may void a company’s deferred compensation plan, with
the effect that all plan participants would be taxed on their deferred compensation.
It is no longer sufficient to document the independent contractor relationship by
executing an independent contractor agreement. The IRS (and Pennsylvania) has
increasingly looked at the issues of control and direction to decide the employee versus
independent contractor question. For example, Federal Express used a 33-page contract to
establish its route drivers as independent contractors. The IRS looked beyond the contract and
determined that the company exercised sufficient control so that the drivers were actually
employees. In addition, courts have ruled that companies cannot coerce an individual to sign an
independent contractor agreement as a condition of employment – that this is interference with
an individual’s right to earn a living.
Finally, it is important to review situations where an individual is contracted solely to
one company. For example, say a landscaper is hired to provide lawn and groundskeeping
services for a large homeowners association. This contract is the only source of income for the
landscaper. Upon examination, a taxing authority may determine that the landscaper is an
employee of the homeowners association, since the association controls the income flow to the
landscaper. Other examples may be a bookkeeper that works for only one business, a flooring
installer that contracts with only one carpet vendor, or a trucker that hauls for one company. The
way around this is to make sure the contractor has other customers, but this point is one not
often thought of by those doing the hiring.
Obviously, all of this points to the need for employers to make sure their compensation
reporting is absolutely correct. It is no longer OK to be in the gray area – the right way is the
only acceptable choice. I urge you to review all employment contracts and other agreements to
identify potential issues. The IRS is coming – better be prepared.
form should cause widespread concern among employers. Designed to help individuals avoid
paying self-employment tax on income that should have been reported to them as wages, the
“back door” intent of the form may really be to catch employers who are not treating workers as
employees. Unfortunately, the form can also be used to bring audits and time-consuming
inquiries upon innocent businesses by disgruntled individuals.
Here’s why companies should be concerned: The form gives the taxpayer
several options to specify why income reported to them as nonemployee compensation (on Form
1099) should instead have been shown as wage (W-2) income. The taxpayer is required to name
the employer, provide the company’s EIN, and specify the reason the income should have been
reported on form W-2. Among the choices are (1) I was previously treated as an employee by this
firm, and (2) my co-workers, working for this firm, are treated as employees. The taxpayer does
not have to submit any form of proof to back their claim. But - you can bet that the IRS will be
quick to launch an investigation against your business if you are listed on one of these forms.
And the onus will be on the employer to show why their reporting was correct, and the taxpayer
was wrong. Guess whose side the IRS will be on!
The majority of companies make a good faith effort to attempt to classify their workers correctly,
either as employees or independent contractors. However, a number of businesses, including
large firms such as Federal Express, IBM, and Coca Cola, have made attempts to treat some
workers as independent contractors. This is basically a cost-saving move, as companies can
avoid employer FICA, Federal and state unemployment taxes, workmen’s compensation, and
employee fringe benefits. The temptation is there to attempt to move more employees to
independent contractor status.
Businesses beware! The IRS has announced a campaign to aggressively seek out
businesses that are improperly classifying workers as independent contractors. This
new form, “Form 8919 – Uncollected Social Security and Medicare Tax on Wages,” is but one
weapon in this campaign. Workers are filing class-action lawsuits in other cases. Employers must
be absolutely certain their reporting treatment is correct. Not only will employers be assessed for
uncollected payroll taxes, interest and penalties, but insurance companies may file claims for
unreported employees for workmen’s compensation and medical insurance premiums. In addition,
failure to include workers as employees may void a company’s deferred compensation plan, with
the effect that all plan participants would be taxed on their deferred compensation.
It is no longer sufficient to document the independent contractor relationship by
executing an independent contractor agreement. The IRS (and Pennsylvania) has
increasingly looked at the issues of control and direction to decide the employee versus
independent contractor question. For example, Federal Express used a 33-page contract to
establish its route drivers as independent contractors. The IRS looked beyond the contract and
determined that the company exercised sufficient control so that the drivers were actually
employees. In addition, courts have ruled that companies cannot coerce an individual to sign an
independent contractor agreement as a condition of employment – that this is interference with
an individual’s right to earn a living.
Finally, it is important to review situations where an individual is contracted solely to
one company. For example, say a landscaper is hired to provide lawn and groundskeeping
services for a large homeowners association. This contract is the only source of income for the
landscaper. Upon examination, a taxing authority may determine that the landscaper is an
employee of the homeowners association, since the association controls the income flow to the
landscaper. Other examples may be a bookkeeper that works for only one business, a flooring
installer that contracts with only one carpet vendor, or a trucker that hauls for one company. The
way around this is to make sure the contractor has other customers, but this point is one not
often thought of by those doing the hiring.
Obviously, all of this points to the need for employers to make sure their compensation
reporting is absolutely correct. It is no longer OK to be in the gray area – the right way is the
only acceptable choice. I urge you to review all employment contracts and other agreements to
identify potential issues. The IRS is coming – better be prepared.
Disclaimer of Liability
The information in this e-newsletter is for general guidance only, and does not constitute the provision of legal advice, tax advice,
accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used
as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or
taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular
situation.
The author of the tax articles in this e-newsletter did not intend nor write the advice to be used to avoid any penalty imposed by a
taxing authority, nor may any user/recipient of this document use this document's written tax advice for that purpose. This document's
tax advice was written specifically to support the promotion or marketing of the transaction/matter addressed by the written tax advice.
Therefore, any user/recipient of this document should seek an independent tax professional's advice regarding the user/recipient's
particular circumstances.
The information is provided "as is" with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and
without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for
a particular purpose.
The information in this e-newsletter is for general guidance only, and does not constitute the provision of legal advice, tax advice,
accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used
as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or
taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular
situation.
The author of the tax articles in this e-newsletter did not intend nor write the advice to be used to avoid any penalty imposed by a
taxing authority, nor may any user/recipient of this document use this document's written tax advice for that purpose. This document's
tax advice was written specifically to support the promotion or marketing of the transaction/matter addressed by the written tax advice.
Therefore, any user/recipient of this document should seek an independent tax professional's advice regarding the user/recipient's
particular circumstances.
The information is provided "as is" with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and
without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for
a particular purpose.
| Serving the Central Pennsylvania area since 1981 |
| Robert A. Romako, CPA |
| EMPLOYERS - IT'S TIME TO REVIEW YOUR INDEPENDENT CONTRACTOR RELATIONSHIPS |
FEBRUARY 2008
| Robert A. Romako, CPA Phone:717.774.3047 |