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What’s Your Exposure, As a Business Owner, to This 1099 issue?

  • Do you hire 1099 contractors for your business?  if so, this CNNMoney.com article is a must read.  The IRS launched an initiative this spring to audit businesses that hire 1099 contractors.  Initially, the plan calls for auditing 6,000 businesses to determine if businesses are improperly classifying workers as 1099 contractors rather than employees.  The obvious benefit to the employer doing this is they do not have to pay employer’s payroll taxes on 1099 contractors.

    The program, to audit businesses, coincides with a number of state auditors also launching their own programs to look at misclassification of employees.   The obvious reason for such programs is to raise additional revenue for both the state and federal government.  An additional benefit is the wealth of information the IRS will obtain.  Speculation is, they will use this information to develop parameters for quickly identifying businesses that improperly classify 1099 workers.

    If it is found that your business hires 1099 contractors improperly and they reclassify those workers as employees, you will be exposed to severe fines, penalties and back-taxes for those workers.  Not only are you liable for all the back-taxes as an employer, but you may be liable for the taxes that should have been paid by the worker as an employee.

    The typical ways a business can be found to have misclassified workers is by an audit or by an investigation that is opened by the Department of Labor.  An investigation is opened after they receive a complaint regarding the use of 1099 contractors for the business.  These complaints, often times, come directly from a 1099 contractor or an employee.  It is not uncommon to have a dissatisfied worker you released, or a 1099 contractor that owes thousands of dollars in taxes, to file a complaint against the business.

    More information about how the IRS classifies employees verses 1099 contractors can be found at the IRS web site.