Thank you to Peter Del Monaco for this month’s guest blog. Companies sometimes contact us at Miles Consulting about multistate payroll related matters, and we then refer many of those requests to Peter, who specializes in such things!
Many employers, especially those small and midsized, are economically and professionally negatively impacted after undergoing a worker classification audit – federal or state. They are caught off guard and some have difficulty ever recovering from the financial impact. Independent contractor and/or worker classification audit defense is an area I spend much of my professional time and want to share with you what I have learned (“the truth”) over the years in order for you to perhaps eliminate (“ the consequences”) from a worker classification audit.
The IRS and state taxing authorities are affected by the same financial burdens as other organizations… the economic shortfall created of conducting and maintaining service, in other words, ensuring that all monies collected are accounted for and holding on as long as possible to the monies collected. One of the best ways of accomplishing this, for Federal and state taxing authorities, is by bridging the gap between taxes withheld and paid to the state or IRS by employers on behalf of their employees vs. no taxes paid for the services rendered by independent contractors. Employment tax audits and specifically worker classification audits are considered as revenue “enhancers”. Therefore, whether you are being audited by a state taxing agent or IRS examiner regarding worker classifications, both consider the worker to be an employee and the burden of proof is on the worker’s organization to prove otherwise.
As an employer, you should be cognizant of the most important factor that underlies most Federal and state regulations as they relate to worker classification:
“Under the common law test, a worker is an employee if the person for whom he or she works has the right to direct and control the worker in the way he or she works both as to the final results and as to the details of when, where, and how the work is to be done. The employer need not actually exercise control. It is sufficient that the employer has the right to do so.”
Many states and other Federal agencies may have different interpretations or variations on the common law test, however, the main principle or underlying tenet is the same – who has the control – is it the worker or is it the employer? Parenthetically, it should also be noted that many state agencies have entered mutual agreements of understanding with the IRS whereby they willing share information regarding a finalized audit. I knew of a company that received an audit request from the state of California within 45 days of closing an IRS payroll tax exam.
This is a very slippery slope and one that most employers should be very cognizant of if they ever decide to engage workers to accomplish tasks for them on their worksite. You want to ensure that you have developed a very clear understanding with the worker that you engaged them solely based on their credentials, references, and their professional ability to achieve the results promised. Memorialize that understanding in writing and ensure that it is executed by both parties. At the very least, it can document the fact that both parties believed they were entering into an independent contractor relationship. Moreover, is important to understand that simply because it is in writing, does not make the relationship independent but rather the honoring of it in fact and in reality makes it so.
During these difficult times and with the instability of a company’s labor force, many employers are looking to establish independent contractor or non-employee relationships to get their work done and/or their services performed while simultaneously reducing costs. However, they should be aware that simply calling someone an independent contractor does not make them so. The same is true for a person working for you on a part time basis. Simply by performing services for you on a part time basis does not make them an independent contractor (as one of my clients thought). They could very easily be considered a part time employee… the facts are the facts are the facts. Be aware of the facts or suffer the consequences. The consequences being for the employer: past taxes for both worker and employer, penalties and interest retrospectively for three years. That is a very steep price to pay if you do not take the time to ask a few basic questions and examine what is to be accomplished and by whom before entering into any working relationship.
About Peter and ETS4U:
Peter and his company ETS4U specialize in Employment Tax Services (ETS) and can provide practical and value-added solutions to help clients manage their payroll tax responsibilities by reducing administrative time and effort, identifying and implementing tax saving strategies and eliminating and/or lessening potential tax liabilities. These types of services are also very important in M&A situations. (Stay tuned for a future blog on that topic!)
