Independent Contractor Compliance Blog

The Internal Revenue Service announced that interest rates for the calendar quarter beginning April 1, 2009, will drop by one percentage point. This adjustment is a reflection of the economy and the prime rate.  I guess there is always a silver lining…but it’s still no bargain.

If you overpay your taxes the new interest rates due to you are:

• Four (4) percent if you overpaid your taxes
• Three (3) percent in the case if a corporation overpays
• However, the IRS only pays one and one-half (1.5) percent for the portion of a corporate overpayment exceeding $10,000

If you underpay your taxes (as in an assessment for misclassified workers) the new interest rates you must pay are:

• Four (4) percent of the amount underpaid
• Six (6) percent for large corporate underpayments

Since in today’s environment almost all tax assessments against a corporation would be over $10,000 (the IRS doesn’t usually spend much effort on small amounts), most IRS tax assessments against businesses will carry an interest rate of 6%, compounded daily.

The State of California’s Current Interest Rate

California’s current interest rate is 5%, also compounded daily. The size of the assessment or type of business does not affect California’s rate. It will remain unchanged through June 30, when it will be adjusted based upon the prime rate at that time. California adjusts its interest rate effective in July and January of each year.

When is interest charged?

These rates apply to simple errors that are identified during processing of returns, on delinquent payments and are added to tax assessments made for income taxes and for misclassifying workers.

It’s the daily compounding…

Both federal and state law provides for interest owed to be compounded daily. The interest is compounded upon itself, daily, from the time the auditor determines the money should have been deposited in the government’s bank account until it is paid. Since audits are conducted by reviewing the past, there is always a lengthy time period that interest has already accumulated before the assessment is made and you have an opportunity to pay. Neither state nor federal law allows for interest to be waived.

This is a silent killer for business that receives an assessment for misclassifying workers. I’ve seen interest alone double liabilities owed because a company made an error in classifying their workers. This cost factor significantly raises the stakes in properly classifying your consultants and contractors.