As part of the ongoing hunt for more tax revenue, the IRS and state agencies have redoubled efforts to track companies misclassifying permanent workers as freelancers.
Over the past decade, the size of the average small business has fallen, indicating the use of more freelancers.
In February, the IRS launched a 3-year program to look into the hiring practices of 6000 companies to find misclassified workers violating the tax code.
President Obama’s proposed 2011 budget includes a budget to add 100 new federal employees to pursue such cases. Plus, it would repeal a 32-year old rule allowing companies such as healthcare and construction industries to legally classify long-term workers as freelancers.
This move comes as the IRS has picked up overall scrutiny of small and medium-sized businesses, increasing by 30% the hours spent auditing companies with less than $10 million in assets.
Although the IRS denies an official focus on small business, some tax experts believe such a move makes sense. Dean A. Zerbe, a managing director of alliantgroup, a Houston tax consultancy says “The IRS believes smaller businesses are more likely to evade taxes, it’s also easier and quicker to audit smaller businesses”.
So what is an Independent Contractor? The IRS says “People such as lawyers, contractors, subcontractors, and auctioneers who follow an independent trade, business, or profession in which they offer their services to the public, are generally not employees. However, whether such people are employees or independent contractors depends on the facts in each case. The general rule is that an individual is an independent contractor if you, the person for whom Statutory Employees the services are performed, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result.”
I guess we shouldn’t be surprised that nobody seems to know the difference…
Tags: small business, tax fraud
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