04 May Have Independent Contractors? Then This is a Must Read
With the proper planning, you can hire workers on your terms as independent contractors and protect their status before, during, and after an audit! Yes, even during an audit.
As you are probably aware of, if the IRS rules that your “independent contractors” are actually employees, you and your business may be liable for tens of thousands of dollars in retroactive federal employment taxes, interest, and penalties. However, if you know the tax law, especially IRS Code Section 530 safe harbor provision, you can navigate through these scary waters.
Your business qualifies for the safe harbor provisions of Section 530 if:
- You never treated any other worker holding a substantially similar position as an employee
- You consistently treated your individual worker as an independent contractor on all tax filings
- You had a reasonable basis for treating the worker as an independent contractor
Warning—Do not convert W-2 employees to independent contractors who are doing the same or similar jobs; and do not have W-2 and independent contractors doing similar jobs.
IRS Code Section 530 stops the IRS from retroactively reclassifying independent contractors as employees-even when those employees are W-2 employees under common law. Also, your business is protected from paying penalties, and keeps continues treating independent contractors as such, even after the IRS finds that a worker should be classified as a W-2 employee
There are a few critical cases on this most important section of the IRS code that one must read and adhere to as well. These cases stress the above factors as well the importance of always providing independent contractors with Form 1099-Misc., and having the documentation providing a reasonable basis for treating your worker as an independent contractor. Therefore, when you hire your worker DOCUMENT your compliance with Section 530, and continue to do this on a periodic basis. This is where you should engage your CPA.