Do you have individuals working for you as independent contractors? Do you know the requirements that determine how an independent contractor is classified? For many businesses, it is time to come clean. If you have issued 1099’s to individuals who provide work for you and have met the IRS’s definition of independent contractors you have no problems. If on the other hand you are trying to save a buck by treating employees as independent contractors, you could be in trouble. If audited, you could end up owing back payroll taxes plus interest and penalties. If you have not properly filed 1099 forms, the IRS will also subject you to a 28% backup withholding tax plus penalties & interest. Fortunately, the IRS and State of Florida are providing an amnesty program.
The burden of proof is on the taxpayer to prove that the people they pay as independent contractors are in fact not employees. The IRS and state governments are itching to reclassify those contractors and have a great deal of flexibility to do so. Reclassification of workers can raise all sorts of problems. For example, The federal government and the states share information, so if one reclassifies your contractors as employees, there is a good chance the other will catch on before too long.
Even though the law requires that an individual report all their income, the IRS holds employers responsible for properly filing a 1099-Misc for any individual who you pay more than $600 to during the year. If you didn’t file the 1099-Misc, you could be facing backup withholding at 28%. In other words, the IRS will charge you 28% of that contractor’s compensation, whether they paid taxes on their own individual return or not. Of course, once the IRS has done that, they can put additional penalties and interest on top as well.
Even if you properly classify all your employees, you are still responsible to withhold and pay the proper amount of tax, social security and medicare on employees, include employer matching, remit payment timely in the manner the IRS requires. Are you using EFTPS by telephone or online? If you are still making tax deposits by paper coupon, you will be receiving penalty notices from the IRS for that as well. If you withhold wages for taxes and fail to pay it, the IRS can change you with a trust fund penalty that will follow you personally even if the business fails, so don’t think of your payroll liability account as an opportunity for leverage.
That is a lot of bad news. Fortunately, we have some good news for you too:
On Sept. 21 of 2011 the IRS launched a new program that will enable many employers to resolve past worker classification issues and achieve certainty under the tax law at a low cost by voluntarily reclassifying their workers. This new program will allow employers the opportunity to get into compliance by making a minimal payment covering past payroll tax obligations rather than waiting for an IRS audit. This is part of a larger “Fresh Start” initiative at the IRS to help taxpayers and businesses address their tax responsibilities. Florida already has a parallel voluntary disclosure program for Unemployment Compensation Tax.
There are requirements to be allowed into the “Fresh Start” program.
1) You must have consistent treatment of workers as independent contractors.
2) You had to have actually filed the 1099-Misc Forms for the past three years.
3) You must not be currently under examination (Audit) by the IRS, Department of Labor or a State Tax Agency.
Many other states also have a voluntary disclosure program to allow employers to come clean and reclassify contractors as employees. This can help you avoid monstrous penalties. It will require laying out funds for back taxes, but the amount of money you will save over the penalties incurred in a reclassification from an audit could be the difference between the life and death of your business.
If you need clarification or have questions about how to come clean we will be glad to help.