The IRS is Encouraging Anyone out of Work to Apply for Unemployment Benefits by Offering a Tax Credit
If the ex-worker who files for UI was your Ex-IC you just moved into a high risk category to be audited.
WASHINGTON-The IRS announced last week that, “All or part of unemployment benefits received in 2009 will be tax free for many unemployed workers.”
A statement also said, “…Under the American Recovery and Reinvestment Act, enacted last month, every person who receives unemployment benefits during 2009 is eligible to exclude the first $2,400 of these benefits when they file their tax return next year. For a married couple, the exclusion applies to each spouse, separately. Thus, if both spouses receive unemployment benefits during 2009, each may exclude from income the first $2,400 of benefits they receive…”
Doug Shulman, the IRS Commissioner stated, “I urge all unemployed workers to take this special tax break into account as they plan their tax withholding and quarterly estimated tax payments for the year. This change offers a helping hand to millions of Americans who are out of work and struggling to make ends meet.”
In my opinion, the IRS Commissioner also had IC’s in mind, at least at a subconscious level, when he made the above statement because:
- Generally, the “quarterly estimated tax payments” Commissioner Shulman refers to are primarily for IC’s, since employees generally have sufficient withholding taken out by their employers at the time they are paid and do not need to make quarterly estimated tax payments.
- Also Mr. Shulman talks about “unemployed workers” a generic term that could include those previously considered to be IC’s.
Your former IC filing for unemployment benefits is the fastest way to get your company audited for misclassification issues and employment taxes.
I’ve reported this before but it doesn’t hurt repeating. Since only ex-employees are entitled to unemployment insurance benefits, employment security agencies (such as EDD) tend to hold former IC’s to be misclassified workers when they apply for UI benefits. It’s a built-in government biased. Once the government determines you have misclassified workers you are a prime candidate for an employment tax audit, because they want to assess your company for the taxes to pay for the benefits they are paying out.
It’s not just about the single claimant who filed for unemployment benefits.
Typically, when an agency like EDD comes in they look at all workers you classified as IC within the statutory period. They want to determine if others have also been misclassified.
Soon, one tax leads the government to another tax and many times other enforcement agencies start knocking on your door. Then the civil class action suites often follow close behind. All because your company treated a consultant as an IC without being able to prove he/she was truly an IC when you were challenged.
The Perfect IC Compliance Storm is more likely during tough economic times.
- The tougher the times the more former “Die Hard IC’s” will view themselves as misclassified workers to gain benefits.
- The government is getting more money to investigate the status of UI claimants as the UI Rate goes up.
- This is also a time when many companies are trying to cut costs by bringing on an IC instead of hiring an employee, which increases exposure.
You only get caught in this Perfect Storm if you’ve treated “IC” (or 1099) as a job title and the working relationship does not meet the common law rules used by the government or by the courts.
Do it right and sleep well tonight.
Yes, it’s possible to engage a legitimate independent contractor without losing sleep worrying about the Perfect IC Compliance Storm. Both state and federal enforcement agencies have publically stated that the use of IC’s is a proper and legitimate business model when done properly. That’s the catch phrase: “When done properly.” Therefore to prove you properly classified your former consultant, who has filed for UI benefits, is difficult but not impossible if done properly.
What’s the catch?
You need to engage an expert to insure it’s done properly.