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Working With Independent Contractors? Make Sure You Dot your “I’s and Cross Your “T’s”

There is no end to the news about falling tax revenues at every level of government. Politicians are scrambling to balance budgets and make up for income shortfalls. Besides adding new taxes, governments are looking for ways to increase revenue from existing tax structures. For years, the IRS has policed the practice of hiring contract workers instead of employees. There are obvious flexibility and tax advantages in structuring a company or a part of a company this way. The IRS has used a 20 question test to assess whether a worker is truly an employee or a legitimate outside contractor. There are signs that they have stepped up their efforts on their policing. There is much more than you probably want to know in the attachment noted below. If the IRS determines that you have been paying people as contractors that should have been compensated as employees, your business faces penalties and fees as well as the order to withhold and remit payroll taxes.

But, there is a new cop on the beat. If your business is in a state like Maryland whose Unemployment Insurance Fund is tapped out, the state people are auditing businesses with independent contractors to find out whether their contractors are really employees and therefore the company owes back unemployment insurance on them. They may be using different criteria than the IRS in making their definition of who is a contractor and who is not.

The point of this blog is that ignorance is most assuredly not bliss. Make sure you get all the facts you need from your professionals-CPA and attorney-and put your business in a position of strength and compliance. For sure, being in total compliance does not prevent a bureaucracy from leveling penalties anyway, but it can sure raise the odds that that they won’t hit you.