Donald Paris, CPA

A client of mine called me the other day all worried. Bill has a company that sells computer equipment, predominantly to the federal government. He had read that the IRS plans on auditing employment taxes this year. He employs people here at his headquarters, as well as has various "account representatives" situated around the country. He wanted to know if he was going to get audited. He worried even more that he might have a problem with employment taxes, since his account representatives are considered "independent contractors". He remembered all the conversations we had had over the years about this issue, and now that the IRS was looking closer at this issue, he was now thinking more about what we had talked about.

I told him that he had read the article right. The IRS sent notices to approximately 2,000 taxpayers already this year (with another 2,000 each in 2011 and 2012) as part of a project called the Employment Tax National Research Project. They plan to target FICA, Medicare taxes and federal income tax withholding. After they finish with these audits, they plan to analyze the results to determine if there is a larger issue worthy of expanding the scope.

I told him that it was going to be very easy for the IRS to look at the issue of independent contractor. All they have to do is review employers who had issued Forms 1099 to independent contractors who had earned more than $600 in a year, and compare the filed 1099’s against the payroll tax returns of any company. Then, they could either send correspondence asking for justification for the classification as independent contractor, or, even worse, ask the company executive to come into the IRS office and explain it to a revenue officer (who happened to be very knowledgeable on the subject).

But independent contractor status was not the only thing they would be looking at. Let’s not forget company provided cars, country club memberships, cell phones, and other employer provided benefits. Bill really wasn’t worried about these other issues, but we all know folks who will worry about them.

So, what should every company president do about this? First, call your CPA and attorney and discuss this issue. Don’t wait. Do it now. I am sure that they discussed this with you before, and you blew it off as just being too conservative. But, this time listen to what they say. Take steps right away to deal with any issue you may have. You could get IRS Publication 1779, Independent Contractor or Employee and review the key issues as they might apply to you. For a more detailed analysis, you should get Form SS-8, Determination of Workers Status for Purposes of Federal Employment Taxes and Income Tax Withholding.