Independent Contractor Compliance Blog - by Collabrus™

Washington - The Internal Revenue Service announced this week that interest rates for the calendar quarter beginning July 1, 2008, will drop by one percentage point. This includes the interest charged against tax liabilities assessed for income tax and for employment taxes resulting for misclassified workers.  The interest charged is compounded daily.

The new rates will be:

• five (5) percent for overpayments [four (4) percent in the case of a corporation];
• five (5) percent for underpayments;
• seven (7) percent for large corporate underpayments; and
• two and one-half (2.5) percent for the portion of a corporate overpayment exceeding $10,000.

For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

Why is this important?

Interest is calculated on all liabilities owed, including other interest and penalties. In the case of worker misclassification liabilities I’ve seen the compounded interest double the amount of tax owed over a period of years. This is a hidden risk that most businesses are not prepared for when they are assessed for misclassifying their workers. The results can be devastating.