Independent Contractor Compliance Blog

WASHINGTON – The Internal Revenue Service has announced that interest rates for the calendar quarter beginning October 1, 2008 will increase by one percentage point. This includes the interest charged against tax liabilities assessed for income tax and for employment taxes resulting from misclassified workers.

The interest charged is compounded daily from the date the IRS believes the taxes should have been paid until they are paid as a result of a tax assessment.

The new IRS rates are:

• Six (6) percent for overpayments [five (5) in the case of a corporation];
• Six (6) percent for underpayments;
• Eight (8) percent for large corporate underpayments; and
• Three and one-half (3.5) percent for the portion of a corporate overpayment exceeding $10,000

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. 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.  I’ve seen the compounded interest double the amount of tax liability owed over a period of years.  This is a hidden risk that most businesses are not prepared for when they make the wrong decision on employee or IC and are assessed for misclassifying their workers. The results can be devastating.