Independent Contractor Compliance Blog - by Collabrus™

Cutting costs incorrectly during tough times can get you audited.

With the current softness in the economy, cutting costs to stay competitive is becoming more common. One way businesses often choose to reduce costs is to minimize the cost of labor. This can mean not filling vacant positions and layoffs, but it can also mean using independent contractors for new projects instead of employees.

The difference between the cost of an employee and an independent contractor can range from 10% to 25% or more. Independent contactors typically do not receive fringe benefits and companies don’t pay the usual government mandated taxes and costs. This savings is seductive and real, unless you don’t protect yourself by doing it right.

Companies are taking risks just at the time the government is ramping up their audit programs.

What happens during tough economic times? Business volume drops, causing the companies to reduce cost, many times by letting people go. When people become unemployed, and can’t immediately find work, they often apply for Unemployment Insurance Benefits. I’ve found that it doesn’t matter if they were an independent contractor or an employee. If they need money they will go to the well. In this case they go to the UI Benefit Well.

State employment tax audit programs are funded, in part, by the number of unemployment claims filed.

This means as more people apply for UI benefits, the more money the government gets to do audits.  So ironically, just as the private sector is hurting for money, the government is becoming flush.

An auditor is paid to audit.

When the government hires more auditors they are going to do more audits, thereby increasing your probability of being selected for an audit.

Companies who have former IC’s are more likely to be audited.

That’s right! One of the major sources for employment tax audit leads is a claim for unemployment insurance benefits by a former IC. If you use IC’s, especially misclassified IC’s, you will attract auditors to your business.

How do you protect your company?

Your protection is to insure you have properly classified the independent contractors to begin with, and you have properly documented the project and relationship in the event you are challenged.

Remember, over 70% of all employment tax audits result in a finding of misclassified workers.