The IRS don’t play no games when it comes to the classification of your workers into the “subcontractor” or “employee” camp.  Did you know that YOU don’t get to totally chose how to pay your people?  They are either subcontractors or employees, as determined BY THE IRS.

Common trick: employers would rather not have employees because they have to withhold taxes for them and pay in taxes (an expense to the business) for their employees.  So, they call them “subcontractors” and don’t worry about taxes.  It saves them time and money.  Pretty smart, huh?  Not really.  An employer may have to pay big time if they have been misclassifying employees as subcontractors…  as in penalties and interest dating back the time they began the missclassification.

Here are a few methods the IRS is using to crack down on employers who misclassify their workers:

1.  The states are going to start sharing information with the IRS that they’ve gleaned from their state payroll audits.  To be sure, more IRS audits will follow.  And the states are often more aggressive than the federal government (IRS) in the collection of taxes owed to them.

2.  Additional “matching software” is being employed by the IRS to determine who is tagged for the next audit.  For example, when a company is not issuing W-2s, but is issuing 1099s to subcontractors of $25k or more, then that company will potentially become a target of an audit.  Keep in mind: the IRS always assumes that companies have employees, thus should be issuing some W-2s.

3.  Taxpayers who don’t want to be classified as subcontractors can file Form 8919 now to tattle to the IRS concerning their employers’ failure to withhold and pay taxes on them.  This handy dandy form can greatly assist subcontractors who don’t want to pay self employment taxes at the end of the year.

The risks in playing the “payroll game” are VERY high.  As an employer, you may have saved time and money, but I’ve seen houses foreclosed on and bank accounts wiped out by the IRS due to the failure to pay payroll taxes timely.  Don’t play this game…

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that (i) any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code; (ii) any such tax advice is written in connection with the promotion or marketing of the matters addressed; and (iii) if you are not the original addressee of this communication, you should seek advice based on your particular circumstances from an independent advisor.