Does your business use independent contractors?  If it does, and if you missed the recent wave of IRS employee-classification audits, consider yourself lucky—the feds might not pass you by next time.  These recent IRS audits will generate the first statistical look at employment-tax compliance since 1984.  Back in the era of Reaganomics and big hair, about 15 percent of employers misclassified an employee as an independent contractor, for a total of 3.4 million misclassified employees.  State audits have shown this problem persists into the ObamaCare years.  Could one of those misclassified employees be yours?

Every business is trying to save money during the economic recession, some by classifying more workers as independent contractors.  And yes, classifying a worker as an independent contractor can save your business money in taxes, overtime, and workers’ compensation.  But if the IRS finds that contractor should actually be an employee, your business will face stiff penalties.  To avoid this costly and all-too-common mistake, remember these employment-classification tips.

• The IRS uses three characteristics to determine the relationship between businesses and workers: behavioral control, financial control, and type of relationship.  All of these factors will affect whether a worker is rightly an employee or an independent contractor.  A business with behavioral control has the right to direct or control how a worker performs the work, via instructions, training, or other methods.  A business with financial control has the right to direct or control the financial and business aspects of the worker’s job.  Finally, the IRS examines the type of relationship, or how a worker and the business owner perceive their relationship.

• If you, the business owner, have the right to control or direct the work to be performed and also how the work will be performed, then your workers are most likely employees.

• If you, the business owner, can direct or control only the result of the work to be performed, and not how that result will be achieved, then your workers are most likely independent contractors.

• If you have misclassified workers as independent contractors, you may face a hefty bill come tax time.  In addition, the IRS can assess penalties for failure to file required tax forms and pay employment taxes.

• If any doubt remains whether a worker is an employee or an independent contractor, both employers and workers can file IRS Form SS-8: Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, which lets the IRS make the classification call.

Don’t wait for an IRS audit to determine your business’ employment-tax compliance—make a preemptive strike with a Human Resources audit.  The experienced HR professionals at YES! Your Human Resources Solution can help you do that.  We’ll review your employee data and eligibility forms for compliance, and we’ll make recommendations to help your business avoid a whopping tax bill on April 15.  (Of course, your legal team will want to be involved for the final changes!)  And that’s just one benefit of a comprehensive YES! HR audit.  Just look at what we did for this Florida company:

HR COMPLIANCE: A Florida service company hit a compliance snag as it expanded operations to California.  Its HR forms, practices, and processes, while compliant in Florida, did not meet California requirements.

YES! Solution: Conducted a thorough HR audit, reviewing I-9 employment eligibility forms, employment posters, employee files, the employee handbook, exempt and non-exempt pay statuses, and on-boarding and termination processes.  Identified areas of noncompliance and provided recommendations.  Created required forms and processes, and worked with management to implement seamless compliance with California employment requirements.

Discover how your business can embrace the power of saying YES!  Visit our website or contact us today for a free consultation.