There has been an on-going and escalating debate: Independent contractor or employee? When is a worker an independent contractor and when is the worker an employee? The answer to that question can make a sizable monetary difference in the taxes that a business pays. This debate is getting a lot of state and federal government attention. Here is the time line:
More than 30 states have passed or introduced legislation targeted at independent contractor misclassification. The United States Government Accountability Office [GAO] Report to Congressional Registers dated August 2009 reported that an estimated 10.3 million or 7.3% of the US workers are classified as independent contracts. In the same report, the GAO found that the number of independent contractors is growing. And, the number of workers wrongly classified as independent contractors is also growing.
A U.S. Department of Labor study conducted 9 years before in 2000 found that 30% of businesses misclassified employees as independent contractors. Per the study, 1% of the misclassified workers nationally amount to losses in unemployment taxes across all states at the amount of $200 million annually.
The GAO in its 2009 Report to Congressional Registers professes that the number of misclassified workers has expanded by more than 50% between 2000 and 2007. In an attempt to squelch this growing trend and stop gap the economic losses, the IRS announced the worker reclassification amnesty.
In order to curb, what the government sees as an ever growing and pervasive issue, the IRS announced a ‘worker reclassification amnesty.’ Under the amnesty program, businesses can raise their hand and say: ‘I misclassified my workers as independent contractors; I agree now to treat them as employees.’ The benefit to businesses is a generous reduction in the federal taxes that should have been paid if the workers were treated as employees, and forgiveness of interest and penalties.
Does your business have independent contractor arrangements? Contact us about doing an employee/independent contractor review. The window for declaring amnesty is closing soon.