(CNNMoney.com) — If your business uses absolute contractors, get accessible for new scrutiny. Hoping to addition tax revenue, the IRS and abounding accompaniment governments are arise bottomward on how companies allocate their workers.
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When administration abode accomplishment for absolute contractors on IRS anatomy 1099, rather than a W-2, they aren’t adapted to pay unemployment insurance, worker’s advantage allowance or amount taxes for them. But the rules administering which workers are absolutely “independent” are austere — and generally flouted.
The Internal Acquirement Service launched a affairs aftermost ages that will about appraise 6,000 companies over the aing three years for agent misclassifications. The federal government estimates it will accession $7 billion over the aing 10 through tighter enforcement.
The IRS ysis affairs is aloof the alpha of what will be “a new era of compliance,” says Gene Zaino, admiral and CEO of MBO Partners, a casework close that specializes in the absolute architect market. “Most states are now administration abstracts with the IRS, and abounding accept set up assignment armament accurately [to address] misclassification. It acclimated to be that if a business ran into agitation with a accompaniment activity administration or with the IRS, the affair was isolated. Now, any affectionate of ysis or acquiescence award can set off a domino aftereffect area the added agencies will get in on the action. “
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Getting audited can be alarming alike for businesses that accumulate aggregate by-the-book. Chris Daly, co-owner of Kinespirit fettle studios in New York City, got an ysis apprehension in January from the New York Accompaniment Administration of Taxation’s Unemployment Allowance Division, which capital to delving Kinespirit’s use of contractors. Like added than 30 states, New York has run out of money in its unemployment advantage armamentarium and is borrowing from the federal government to accumulate advantageous claims.
“We knew we were accomplishing it adapted but that doesn’t beggarly we weren’t concerned,” Daly says. “We accept the bearings states are in; unemployment allowance is a bare tool, and we accept the charge to armamentarium that tool. And there are companies out there that don’t appetite to armamentarium their share.”
Kinespirit classifies its authoritative and authoritative agents as advisers and its fettle trainers and advisers as contractors. The ysis activity was exhaustive, but the aggregation emerged clean.
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Following the rules: So what’s the actual ogue of an absolute contractor? It depends on who you ask.
Some business admiral say a accurate absolute architect is active by a abstracted association or acknowledged entity, either one they own or a third-party firm. That rules out freelancers who don’t formally set up a business anatomy to abode their 1099 income.
But hewing to that ogue didn’t assignment for Mega Builders, a Chicago-area architecture aggregation that got hit with a $328,500 accompaniment accomplished in December on the area that it had misclassified 18 of its advisers as absolute contractors. The aggregation allegedly affected its workers to incorporate, alike admitting they didn’t accomplish bona-fide businesses, says Jeffrey Risch, an advocate accustomed with the case and a accomplice at the St. Charles, Ill., close SmithAmundsen.
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In his audit, Daly says the accompaniment examiners seemed best absorbed in whether his alleged absolute contractors were able to ascendancy their own schedules and the address in which they accomplish their work.
But for 352 Media Group, a Gainesville, Fla.-based Web development close that afresh reorganized the way it handles absolute contractors in adjustment to ensure compliance, one of the important issues was area the assignment is completed and who owns the accessories used.
“We acclimated to accept contractors alive in our appointment on approved schedules and application our equipment, which was account for concern,” says Geoff Wilson, 352’s admiral and CEO. “Thankfully, aback we assassin a new HR director, she apparent this botheration and formed with our contractors to either catechumen them to advisers or accomplish abiding they were accomplishing the able things to advance their architect status.” That included application their own equipment, alive out of their own home or appointment and demography on jobs for added clients.
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While the IRS publishes guidelines for free artisan classification, the IRS factors are “similar, but not identical, to tests relied aloft by added agencies, such as artisan advantage and unemployment allowance agencies,” says Susan Bishop, advocate at Campbell, Calif.-based Pratt & Associates. “Factors from all applicative agencies should be advised aback authoritative a decision.”
If you’re not abiding whether your absolute contractors are appropriately classified, ysis the adapted guidelines from your accompaniment and the IRS, or — bigger still — argue a bounded tax advocate or accountant to advice you array it out. You can appeal a assurance by the IRS by filing Anatomy SS-8, Bishop notes. Third-party firms like MBO Partners additionally admonish administration on architect issues for negligible fees.
Like Mega Builders, firms that are audited and begin to be awkward can face abrupt fees. The best advance of activity is to appraise your artisan classifications now, afore a government commodity gets involved.
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“Using contractors offers a lot of benefits, but you accept to accomplish abiding you’re accomplishing it right,” says 352 Media’s Wilson. “You don’t appetite the government to appear calling and adjudge you owe a lot of aback taxes for classifying contractors incorrectly. Be acute about account the government’s architect allocation guidelines and accomplish abiding your contractors absolutely abatement aural them.”
First Published: March 29, 2010: 9:22 AM ET
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