Small businesses are increasingly turning to using independent contract
workers as a way to keep personnel costs low. Hiring contract workers
helps small businesses avoid some of the tax and legal requirements that
come with full-time employees and gives them the flexibility to employ
workers only when they have work to be done. The increased popularity of
using contract workers has attracted the attention of the IRS.
A recent article in the Wall Street Journal reports that the IRS has increased the number of payroll audits it conducts.
Since 2010, the IRS, in partnership with the Labor Department, has set a
goal to investigate 6,000 employers in over twelve states who are using
contract workers. During these audits the IRS attempts to verify that
full-time employees are not being misclassified as contract workers.
The
goal of these audits is at least in part a financial one. Since
September 2011, the government has collected over $9.5 million in back
wages from employers who misclassified their workers as independent
contractors. According to estimates released from the US Treasury,
by forcing employers to accurately identify independent contractors as
full-time employees while eliminating the degree of freedom given to
employers in classifying these workers, an extra $8.71
billion in tax revenue would be generated over the next ten years.
Studies
done by various states estimate that 10% to 60% of their local
businesses are misclassifying their workers as independent contractors.
Small businesses owners often find it difficult to distinguish a
full-time employee from an independent contractor. The factors used to
make this determination can be somewhat subjective and bills from
Congress aiming to clarify the distinctions have not yet been passed.