The Internal Revenue Service, trying to recoup some of the estimated $14 billion that companies underpay in employer taxes a year, plans to wage a three-year campaign to audit 6,000 businesses. 
 

The cash-strapped government will zero in on worker classification, fringe benefits, reimbursed expenses and executive compensation. The selection of the audited companies will be random, and both big and small businesses will be scrutinized.

Defining who is, or isn't, an employee may be the biggest challenge for the IRS and those it audits. While some businesses may be confused about how to properly classify workers, others may misclassify employees to bypass protections, such as minimum-wage laws, child-labor standards and overtime requirements, and avoid having to offer health and pension plans.

 

If someone is classified as an independent contractor, they might not be included in a health plan or a 401(k) plan.  But if they are reclassified by the IRS, the employee may be entitled to benefits retroactively.

 

The IRS last embarked on a comprehensive assessment of misclassification in 1984. At the time, the agency estimated that about 15% of employers misclassified 3.4 million workers. A 2005 government survey determined that 10.3 million U.S. workers were categorized as independent contractors, about 7.4% of the workforce.

 

The matter of who is an employee versus an independent contractor is, in the tax world, is almost akin to a religious concept. It is how you feel and what your faith in the concept is all about. It is difficult to nail down. There is no bright-line test.

 

The moral of the story: If you have employees, make sure someone outside of your organization, is verifying that indeed they are properly classified or you could owe big money not only to the IRS but to the misclassified employees.

 

Wishing You Many Happy Returns,