IRS AUDITING BUSINESSES REGARDING SUBCONTRACTORS
The IRS has announced it is going to closely scrutinize sub-contractors as its next enforcement initiative. They are especially interested in finding:
They will be performing random audits of taxpayers who file business returns. Schedule C-Self-Employed, Corporate, LLC, Partnership and Non-Profit returns are being targeted.
If you are selected for audit and your contractors are re-classified as employees, the penalties are SUBSTANTIAL:
MISCLASSIFICATION:
The IRS will be evaluating the 20 factors to determine correct status and is generally requiring that most or ALL twenty factors are being met in order for a sub-contractor to keep their status.
Additionally, they will be examining whether there are current employees doing the same job as the contractor or if you have had employees doing that job in the past. The IRS will also be reviewing the length of the relationship and this will strongly influence them. Consequently, the longer a contractor works for you, the more likely the chance of them being called an employee.
PAYING UNDER THE TABLE:
The IRS requires that you file a Form 1099-MISC for all non-employees who earn more than $600 in a calendar year. The fine for late or non-filing is $50 per form.
TWENTY FACTORS THAT INDICATE WHETHER A WORKER MAY BE A SUB-CONTRACTOR
(1) Instructions. An employee must comply with instructions about when, where and how to work. The control factor is present if the employer has the right to require compliance with the instructions.
(2) Training. An employee receives on-going training from, or at the direction of, the employer. Independent contractors use their own methods and receive no training from the purchasers of their services except orientation and safety training.
(3) Integration. An employee’s services are integrated into the business operations because the services are important to the business. This shows that the worker is subject to direction and control of the employer.
(4) Services rendered personally. If the services must be rendered personally, presumably the employer is interested in the methods used to accomplish the work as well as the end results. An employee often does not have the ability to assign their work to other employees, an independent contractor may assign the work to others.
(5) Hiring, supervising and paying assistants. If an employer hires, supervises and pays assistants, the worker is generally categorized as an employee. An independent contractor hires, supervises and pays assistants under a contract that requires him or her to provide materials and labor and to be responsible only for the result.
(6) Continuing relationship. A continuing relationship between the worker and the employer indicates that an employer-employee relationship exists. The IRS has found that a continuing relationship may exist where work is performed at frequently recurring intervals, even if the intervals are irregular.
(7) Set hours of work. A worker who has set hours of work established by an employer is generally an employee. An independent contractor sets his/her own schedule.
(8) Full time required. An employee normally works full time for an employer. An independent contractor is free to work when and for whom he or she chooses.
(9) Work done on premises. Work performed on the premises of the employer for whom the services are performed suggests employer control, and therefore, the worker may be an employee. Independent Contractor may perform the work wherever they desire as long as the contract requirements are performed.
(10) Order or sequence set. A worker who must perform services in the order or sequence set by an employer is generally an employee. Independent Contractor performs the work in whatever order or sequence they may desire.
(11) Oral or written reports. A requirement that the worker submit regular or written reports to the employer indicates a degree of control by the employer.
(12) Payments by hour, week or month. Payments by the hour, week or month generally point to an employer-employee relationship. (Contractors are paid via commission or the job)
(13) Payment of expenses. If the employer ordinarily pays the worker’s business and/or travel expenses, the worker is ordinarily an employee.
(14) Furnishing of tools and materials. If the employer furnishes significant tools, materials and other equipment, the worker is generally an employee.
(15) Significant investment. If a worker has a significant investment in the facilities where the worker performs services, the worker may be an independent contractor.
(16) Profit or loss. If the worker can make a profit or suffer a loss, the worker may be an independent contractor. Employees are typically paid for their time and labor and have no liability for business expenses.
(17) Working for more than one firm at a time. If a worker performs services for a multiple of unrelated firms at the same time, the worker may be an independent contractor.
(18) Making services available to the general public. If a worker makes his or her services available to the general public on a regular and consistent basis, the worker may be an independent contractor.
(19) Right to discharge. The employer’s right to discharge a worker is a factor indicating that the worker is an employee.
(20) Right to terminate. If the worker can quit work at any time without incurring liability, the worker is generally an employee.
The IRS does NOT consider whether or not the worker received a W-2 when making their determination. Additionally, they do not consider state law or any other government or industry-imposed regulation.