Eighth Tip to Help Avoid a Tax Audit:
The IRS continues to have several audit watch areas for compliance through 2013. Small businesses are going to be a major focus this year. This includes corporations, partnerships and sole proprietors. While you never know when you may be selected for an IRS Tax Audit, these tips will help you understand what the IRS will be focusing on through the 2013 tax season.
Audit Watch Area number 8 “Proper worker reclassification“:
Almost all business audits include employment tax issues. In particular, the IRS is interested in worker status. The IRS understands that businesses have an economic incentive to misclassify workers as independent contractors rather than employees. It costs about 30% less for a business to employ an independent contractor than an employee (payroll taxes, unemployment benefits, workers’ compensation insurance, fringe benefits, etc.). The IRS thinks there is significant noncompliance in worker classification and will continue to focus its field examination resources in this area.
The IRS uses several common law factors in determining if a worker is an employee or an independent contractor. The degree of control an employer has as well as the independence of the worker can be broken down into three categories. These include:
- Behavioral
- Financial
- Independence
If you choose to have an independent contractor, we recommend that your business utilize a contract, just as you do with employees. The business should also document the steps taken to determine why the workers are classified as independent contractors over employees.
If you’re in need of a CPA, contact Jennifer Farnsworth of Farnsworth & Associates, PC.
