Independent Contractor Compliance Blog - by Collabrus™

Look anywhere in the media, and you will find indicators that predict there is The Perfect Independent Contractor Compliance Storm threatening American businesses on the horizon.

What indications predict this “Perfect Storm”?

There are powerful economical, legal and political forces merging to create a unique historical situation.

• Government at all levels is looking to collect more money
• Politicians want tax agencies to collect more taxes
• As a result the government will soon be taking extraordinary measures to enforce IC compliance laws and collect every possible tax dollar.

Want proof?

The Federal Tax Gap is reported at $345 billion per year. The IRS estimates that $54 billion of the Tax Gap is related to underpayment of Employment Taxes, such as FICA, Federal Unemployment Tax, and Self Employment Tax.

Another estimated $25 to $50 Billion can be traced to “illegal” Schedule C deductions taken by 1099 filers that should have received a W-2 and not be allowed to take the deductions reserved only for genuine independent businesses.

Politicians are pressuring the IRS and state tax agencies to close this Tax Gap as a way of generating more revenue, because it is more “politically correct” to enforce the current laws than to levy higher taxes.

As a result,

• Officials from the IRS and more than three dozen state agencies have entered into agreements to share the results of employment tax examinations to seek out and penalize businesses that misclassify workers, enabling them to collect more revenue in the process.

• Several new state and federal laws have been proposed to provide powerful IC compliance tools for enforcement agencies and to severely punish those who misclassify workers. One of the toughest bills (U.S. Senate Bill 2044) was coauthored by President Obama when he was still a US Senator.

• The unemployment rate is the highest it has been in decades, and employment tax enforcement agencies (both state and federal) are funded to hire more tax auditors when more people file for unemployment insurance benefits.

• More tax auditors means more tax audits.

• President Obama has promised to make health care available to everyone—including IC’s.

• It’s easier to cover workers for health care if they are employees.

• This puts more pressure on insuring workers are “properly classified.”

It’s not just the government.

There is a rise in labor class action suits across the country and lawsuits are becoming increasingly more expensive.  Open any labor website and you’ll find civil suits against American businesses.

• Last year 26% of U.S. firms experienced new labor lawsuits with claims above $20 million.

• There are private law firms who build their entire practices representing workers (both those classified as employees and those classified as IC’s) against their employers.

• Many lawsuits never make the news because they are either too small or the company settles quietly to make the problem disappear.

The Perfect Compliance Storm

All these events are coming together at the same time to create a perfect compliance storm. I predict this storm will create a wave that will engulf the independent contractor and contingent worker industry. Businesses that are not properly protected will be flooded with back taxes, fines, penalties and interest. Some businesses will not survive the cost of coming into compliance by force.

Now, before the storm hits is a good time to insure your compliance ship is seaworthy.