Wednesday, January 27, 2010

IRS audit will focus on worker classification

The IRS is cracking down on worker misclassification. Beginning February 2010, the IRS will randomly select 2,000 companies every year for the next three years to audit their worker classification, executive compensation, and fringe benefits.

Classifying workers as independent contractors has several tax benefits because it reduces the employer’s payroll tax withholdings, FICA contributions, and health insurance premiums among other things.

Misclassification, however, is a serious problem because it can result in large payroll taxes and penalties. In a report released in 2009, the IRS estimated 15% of employers misclassified 3.4 million workers, which resulted in the loss of $1.6 billion in tax revenue.

To help employers better determine whether a worker is an employee or independent contractor, the IRS has put together a 160 page guide for your reference available on their website:

Classifying employees the right way
Be careful how you classify your employees
IRS gets serious about employee classification

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