Independent Contractor Compliance Blog - by Collabrus™

WASHINGTON - The Internal Revenue Service announced this week they have launched a campaign to help educate new self-employed small business owners about federal tax responsibilities. This is includes independent contractors who receive a 1099.

“One of the biggest challenges faced by people starting out in business is understanding and meeting their tax filing requirements,” said Kathy Petronchak, commissioner of the IRS’s Small Business/Self-Employed operating division. “It’s a new, different and potentially overwhelming experience for them…”

The article went on to explain the IRS is particularly concerned with accurate filing of the new Schedule C, Profit or Loss from Business. The article stated, “About one in seven federal income tax returns includes a Schedule C or Schedule C-EZ (the short form for the smallest business owners).

The IRS also noted they are concerned about the following “potential problems”:

• Classify workers properly as employees or independent contractors as determined by law, not the choice of the worker or business owner;
• Deposit federal employment taxes, called trust fund taxes, according to the appropriate schedule;
• Start making quarterly estimated-tax payments….

Other topics associated with this latest IRS article:

The IRS defined burden of proof as: “The responsibility to prove entries, deductions, and statements made on your tax returns…You must be able to prove (substantiate) certain elements of expenses to deduct them.”

The IRS also reminds you that, “Employers are ultimately responsible for the payment of income tax withheld and both the employer and employee portions of social security and Medicare taxes.”

Could this be a warning of enforcement efforts to come?

I recommend you read my previous article covering the IRS’ concern over the Tax Gap, which is estimated at over $350 billion per year. In that article I report the IRS believes erroneous Schedule C deductions taken by misclassified workers are responsible for a significant segment of the Tax Gap.

In another article entitled, “IRS and States to Share Employment Tax Examination Results on Misclassified Workers.” I predicted there will be an increased effort in identifying and assessing businesses for misclassified workers.

Draw your own opinion, but I believe this is yet another warning shot for companies using independent consultants. There will be an increase in state agencies and/or the IRS asking companies to prove retroactively, that they properly classified 1099 consultants.

Source: IRS Publication, IR-2008-063