Independent Contractor Compliance Blog - by Collabrus™

Typically, when the economy struggles businesses try to cut costs. One common method is by employing workers as independent contractors to avoid the costs associated with employees.  This tactic will save money only if it’s done correctly. This is not a good time to do it wrong, because both federal and state governments are gearing up their IC compliance efforts at this very moment.

Federal and state governments need more revenue.

It’s no secret both federal and state governments across the country are strapped for money and are seeking ways to bring in additional revenue. It’s also no secret most voters are strongly resisting any raise in tax rates, so the politicians are looking for an “end run” to raise more money.

A popular method employed by Politicians to increase revenue collected

It is easier to enforce current tax laws with more authority than it is to pass tax increases. So a common tactic used by government is to tighten down on is IC compliance. That’s because enforcement is the “high ground.” Doing so not only collects back taxes, penalties, and interest, but it also protects the workers’ unemployment benefits, workman’s compensation benefits, social security benefits, disability benefits and contributes to fair competition between businesses. So the government can claim to be helping both the worker and the employer, making it fair for everyone-leveling the playing field.

Do you want examples?

At the Federal Level

The IRS is under increased pressure to become more efficient in collecting federal employment taxes. The General Accounting Office issued a report to congress earlier this year finding that the IRS is not achieving compliance in the collection of federal employment taxes. This report doesn’t look good for the IRS when, even by its own estimates, 15% to 25% of the infamous Federal Tax Gap is related to 1099 misclassification and underreporting issues.

Congress is interested in increasing compliance too. The American Recovery and Reinvestment Act of 2009 increased IRS funding to hire 4,500 new revenue agents for the purpose of closing the tax gap.

In an apparent response to the GAO and Congress, IRS Commissioner Douglas Shulman told Congress in May 2009, he is placing more importance on greater enforcement of worker misclassification as a method of closing the “tax gap.” He recently announced the IRS will conduct 6000 employment tax audits in the next year as a pilot to determine the extent of non-compliance.

At the State Level

Employment tax agencies (like California’s EDD) get funded to a significant portion based on the number of people who file for unemployment insurance benefits. The more people who make UI claims the more money EDD gets to do audits.  So as the unemployment rate increases so do the chances of being audited.

The State of California’s EDD is hiring right now. They are advertising for applicants on their website.

This is not a good time to cut corners in IC compliance.