Thursday, March 20, 2008


Recently I published information regarding independent contractors. Here is more on that subject from the IRS. Remember this applies to all businesses not just salons and spas, but we may all be in their crosshairs.

If you need any further information let me know and I will send you the releases from the IRS.

This is from Kipplinger...

IRS is on the warpath with new weapons for tracking down companies that violate rules used to determine whether workers are employees or independent contractors for tax purposes. The result: More employment tax audits in a few months after IRS generates more leads.

Take a look at what's in IRS' arsenal:

  • More help from the states. The Service so far has signed up 33 states to share data from payroll tax exams, which will likely mean thousands of new audit leads using state records.

  • There's another twist: Federal and state agents will train together and even conduct joint exams in some cases. IRS claims it wants classification to be more uniform. However, businesses worry the partnership could ensnare them unfairly because many states have a much broader definition of who is an employee.

  • Revved-up matching programs to better pinpoint audit leads and lessen chances for no-change exams. An electronic matching system, for example, lets IRS spot businesses issuing 1099 forms with payments of $25,000 or more to at least five workers with no other income sources.

  • Audit leads from workers. IRS will soon get the first wave of Forms 8919, which taxpayers can file with their 2007 tax returns, to tell IRS that they believe their employers incorrectly classified them as contractors. A flood of these forms is likely because filing the 8919 allows an individual to avoid paying self-employment tax to the Service.

Businesses that are contacted by the Service needn't panic. There's relief under the law that may help them lessen the damage from an audit: They can invoke a 1978 law that limits the IRS' ability to reclassify workers. Companies must be able to show they filed 1099s on their workers and treated similarly situated workers as contractors. And the firms must have a reasonable basis for classifying them that way. Valid reasons include reliance on precedent, a court case or IRS ruling, prior industry practice or a previous IRS employment tax examination. And firms that can't get relief can still limit their tax bill. Reduced IRS penalties apply when misclassification is not intentional.

But more trouble looms for firms on the classification front. Democrats' high-profile probe into alleged intentional misclassification by a big government contractor increases the chances for legislation that would strengthen IRS' hand during exams. The bill would allow IRS to require reclassification of contractors as employees prospectively and end industry practice as a way for firms to avoid reclassification.