Will the IRS turn your contractors into employees?

One of the big red flags with the IRS these days happens when you have independent contractors or subcontractors.

If you do not properly prepare Form 1099s for them, the IRS may deny the deduction for amounts you pay them. They may even decide they should be employees instead of independent contractors (ICs).  Note: Most businesses do not prepare 1099s properly.

And, it is not just the IRS that you need to be concerned with either. States are getting in on the action looking for more money to for their unemployment funds.  One new client of mine thought that they had things set up properly only to find that the state department of labor came down on them.  Hard.  And they ended up owing back unemployment taxes.  And penalties.  And interest.   All because things were not done properly.

For the business, ICs mean a whole lot less in tax and no required employee benefits. It means you have defined contractual work with terms you agreed on, not work based on changing federal and state employee guidelines and court decisions.

And for the worker? Being an IC means they’ll pay a whole lot less in tax, if they know to take advantage of the tax breaks. If they don’t and they get the wrong advice, they may be the ones who turn you in.

So, if you are going to go the Independent Contractor route, make sure that you follow all of the rules so that you are not fined, penalized, harrassed and otherwise bothered by the enforcement of labor laws and regulations.

The answer to all of this is education.

Educate your workers on the benefits of being ICs.  Make sure you follow the rules and have a valid IC agreement.