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IRS Gives Employers Partial Amnesty on Employees Misclassified as Independent Contractors

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The Internal Revenue Service (IRS) is offering a partial amnesty to employers who openly come forth about having misclassified employees as independent contractors, or "1099's" to avoid paying federal payroll taxes, the IRS announced this week. irs employees independent contractors

Why do Employers Classify workers as Independent Contractors vs Putting them on the Books as Employees?

When business owners employ the use of Independent Contractors they don’t have to pay the additional overhead costs associated with having employee payroll such as unemployment insurance taxes, workers’ compensation insurance premiums or the their share of Social Security and Medicare costs. This classification also gives the 'workers' fewer rights and benefits like sick time, vacation, and potential tenure with the company.

Employers that decide to opt for use of the new IRS program must reclassify workers as employees and pay just over 1% of the wages paid to the independent contractors for the past 12 months. The IRS has stated that no interest or penalties will be assessed or due to the employers for electing this program, nor will they be audited on payroll taxes related to these workers for prior years.

The IRS states that this program covers only Federal Employment Taxes; businesses may still be assessed and liable for unpaid local state payroll taxes.

To qualify, business owners must have classified the workers as independent contractors, or "1099'd them" in the past and filed and paid all of the associated taxes. Employers who have simply been paying workers 'off the books' can not apply.

An IRS Representative states that they are trying to create “the right behavior so that people pay their taxes this year, five years from now and 20 years from now." They want to make it as easy as possible for people to come in and get right hereon.

The IRS did not set a deadline yet for businesses to apply.

The IRS also states that "If businesses don’t come forward and are later caught wrongly classifying employees as independent contractors, they could be liable for three years’ worth of employment taxes, plus interest and penalties."

Workers Compensation Insurance & Disability Insurance

Employers should also note that when Independent Contractors are reclassified to Employee status, moving forward, they will need to now pay all of the associated taxes and expenses associated with having employees. These include payroll taxes, workers compensation insurance , disability insurance, social security.  It is also important to note that in New York businesses that do not have workers compensation have been issued fines on the order of $200.00 per day for each day they do not have workers compensation. In many cases, this far exceeds the cost of the actual coverage.


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Sunday, October 22, 2017
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