IRS pushes to reclassify independent contractors as employees

A recent article at discusses the new regulations the IRS and several sates have passed to push employers to reclassify independent contractors as employees.

A recent article at discusses the new regulations the IRS and several sates have passed to push employers to  reclassify independent contractors as employees.


A Loss of Independents?

Regulators have rewritten the rules regarding the use of independent contractors, forcing companies to make hard choices — and possibly pay heavy fines.

by David M. Katz

As companies make greater use of independent contractors, the Internal Revenue Service is pushing to get many of those self-employed workers reclassified as employees.

For many companies, particularly small and midsize firms, the ability to classify certain workers as independent contractors provides what they regard as essential flexibility.

If such reclassification were widely enforced, companies would have to start withholding federal income, Social Security, Medicare, and unemployment taxes from freelancers’ wages — not to mention possible payment of fees and penalties for previous misclassifications. Further, such firms would have to start paying for the same employee benefits and workers’ compensation that they currently do for full-time employees.

Carrot and Stick
How likely is it that such a scenario would occur on a broad scale? Not very — especially because the IRS, the Department of Labor, and the states themselves don’t have the staff needed to provide such enforcement. Yet even as the economy grows more reliant on temporary labor, regulators are becoming increasingly vigilant about getting employers to classify previously mislabeled workers.

The IRS, for example, has lately been wielding both carrot and stick. This fall the service introduced a voluntary program that might enable some employers to shed certain tax liabilities by dubbing certain independent contractors as employees. But that program came on the heels of a year-and-a-half-long crackdown by IRS agents on potential misclassifications, according to Kathy Mort, a managing director in PwC’s Washington, D.C., national tax services office.

Faced with burgeoning federal and state budget deficits, regulators see a vast pool of potential back taxes, fees, and penalties to be gleaned from the detection of employee-classification errors. Currently, the IRS estimates that 15% of all employers have misclassified a total of 3.4 million employees as independent contractors, resulting in an estimated annual revenue loss of $3.4 billion in 2010 dollars.

While many companies err on the side of caution and forgo the use of independent contractors, for those employers “that have [long assumed] that a large group of contractors is not going to be looked at, there’s a more significant risk than there ever was that someone — the DoL, the IRS, or state agencies — is going to look at them,” Mort says.

In September, Secretary of Labor Hilda Solis seemed to ratchet up that risk when she hosted a ceremony in Washington to sign a memorandum of understanding with the IRS and representatives of seven states “to end the business practice of misclassifying employees in order to avoid providing employment protections.” (The states are Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah, and Washington.)


Red the full article here.


What should your homeschol organizations do?


Carol Topp, CPA



  1. I work as an independent contractor for several for-profit businesses who provide classes to home schoolers, so I have been following this with some interest. In each case, those who hire me dictate what curriculum I must use, give an outline of topics to be covered each week, and require training each year. It sounds like they’re not quite following the guidelines for independent contractors. What should I do? I’m nervous about this.

  2. The nonprofits are the ones who should be nervous, not you.
    Make sure you receive an accurate 1099MISC form each year and report it on you tax return. You have fulfilled your obligation to the IRS.
    You should share your concerns with the nonprofits in the spirit of helpfulness. They may be clueless as to the IRS audits into worker classification.

    Carol Topp, CPA

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