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The Independent Contractor Crackdown

If your business relies heavily on independent contractors, you may soon face severe government scrutiny.

In President Barack Obama’s 2011 proposed budget, the Internal Revenue Service will receive $25 million and one hundred new enforcement agents in an attempt to crackdown on workers who are misclassified as independent contractors. The current President expects that such enforcement will add $7 billion in tax revenue over the next ten years.

This move is even more hotly contested when you consider that 50% of the jobs created through economic recovery are based on contingent (independent contractors and temporary workers) labor. The President has been taking aggressive actions to close the $350 billion tax gap that Mr. Obama claims has been created by noncompliance with tax laws. For example, in November of 2009, he issued an executive order to intensify efforts to reduce improper payments to contractors by eliminating payment error, waste, and fraud in the federally administered major programs of the United States Government.

The IRS has also begun a three-year audit of 6000 companies. These are not just major corporations or companies under any sort of suspicion of tax infraction. These are randomly chosen businesses of all types, sizes, and shapes. The term applied is statistical sampling, something we know as luck of the draw. Experts say that it won’t stop there. They believe that the IRS is just gearing up for a run at business under the new administration.

It is estimated that businesses can hold down costs by as much as 30% by utilizing the services of such contractors. This is because the business does not have to worry about paying Medicare or Social Security taxes, workman’s compensation, vacation time or sick leave, unemployment compensation, or concern itself with minimum wage or overtime issues. That is all the obligation of the independent contractor.

Using independent contractors can be a big break for a company, but it’s a big risk, as well. In 2000, Microsoft had to pay almost $100 million in taxes, missed payments, and penalties due to misclassification of independent contractors.

The states are deciding to follow the federal government’s example and go after businesses for misclassification of independent contractors as well. All of these governments are seeing the possibility of scoring big dollars by aggressively pursuing small, medium, and large businesses that they want to pay a bigger cut of the tax pie.

The advice to business people using independent contractors is to get a good tax attorney and be absolutely positive that your independent contractors meet all of the requirements of federal, state, and local law that qualify them for that category.