Recently in employment taxation Category
These desperate times call for desperate measures and Livermore city watchdogs are no exception. Local officials and the IRS teamed up to tag home based independent contractors and other small business owners for unpaid business licensure fees. It's no secret the state, federal and local governments are operating in the red and not likely to miss an opportunity to add a few dollars to empty collection plates. The size of the reward must be worth the chase if authorities were willing to wade through reams of tax data and other countless pieces of paper. If the tax man put forth this much effort to bring in nominal fees what lengths will they go to collect from large benefactors of this underground workforce?
So the next time that independent contractor you hired says "I don't need a business license" stop! Don't just take a claim of exemption check it out!
Another employer business practice check includes independent contractors and small business owners. All employers can look forward to yet another test in the very near future. This news should come as no great surprise to employers and those following the daily business headlines.
A bill signed by President Bush earlier this month and goes into effect in 2011 is expected to generate $98 billion dollars in additional tax revenue over a 10 year period. The premise for the bill is to catch tax cheats utilizing on line payment services to cover up questionable unfair labor practices. Although not all transactions must be reported to the IRS under the new law in fact purchases or payments totaling less than $20,000 and not in scope offers little comfort to small business owners and those identified to mind the store. This new law will place yet another bull's eye on the backs of all employers and potentially add hidden costs for those identified to carry out the orders.
To catch a tax cheat
Third party payment processors like PayPal recently learned this bill is directed at them and will require additional checks as part of its on-line payment process. The bill comes complete with strict reporting requirements designed to alert the government of transactions inline with the guidelines outlined above. In addition to the actual reporting warm-up exercises prior to the actual payee bout may result in trying times for everyone. First assignment is to verify each Tax ID number for every business owner's transaction. Layered in are next steps in the event the company is unable to verify a number. Instructions are to withhold 28% of the payment until such time the number has been successfully verified. Imagine being on the other end of the phone or the recipients' follow up email.....
Roadblocks designed to catch those who have become adept at mudding the audit trails may suddenly become a trap for enforcers. These employers who tend to lean towards the spirit of the law instead of following the letter of the law diverting suspicion by hiding under an online shield will get over once again. Even when eventually caught in one of these safety checks they may simply chalk it up as just another hazard of doing business
Home based virtual staff seems to be the wave of the future for small business owners who want to sidestep the headaches and the expense of a traditional brick and mortar office.
Given the current economic downturn, employers everywhere are taking necessary steps to reduce costs, often starting with staff cuts forcing them to seek out temporary workers or independent contractors to help fill the void. Today's employers are entertaining all options that offer cost savings including those that address costs associated with a fulltime workforce. A highly successful offering with Canadian employers Virtual Pro is a huge hit in the U.S market since it was launched by StaffPro America in February. Employers who are looking for alternatives to the traditional staffing model have been very receptive to this new idea because of all the front end pluses. The model allows employers to gain access to a transient talent pool, work can be project based with no long term commitments and virtually no employer responsibilities that go along with traditional employment. It seems employers have embraced this concept and this could be a leg up on the competition for StaffPro.
Although StaffPro acknowledges the solution is still very much a traditional staffing firm model it is unique in that neither party bears the responsibility of the employer given the workers are "independent contractors" and "self employed". These individuals are responsible for adhering to the riggers associated with operating a business paying their own taxes, obtaining other clients, writing handling the contract and when the project is done neither the employer nor the staffing company has unemployment costs to worry about. Given this alternative worker model has been so successful in Canada StaffPro is optimistic they can repeat it in the U.S. A huge advantage for StaffPro it has no local competitors and it expects to boost its revenue by 19 percent this year if this endeavor is a hit.
A possible success factor for the Canadian operation maybe in the past revenue seeking agencies in Canada has not been as aggressive in its employer auditing efforts as the IRS in the U.S. However in the last 5 years numerous worker misclassification cases against employers have been tried and won and employer compliance continues to be a focus in Canada. In the U.S. employer workforce compliance has endured heavy scrutiny given it is at the forefront of political campaigns, on the lips of workers and numerous notable cases make the headlines on a daily basis. Now more than ever employers must ensure the programs and solutions they adopt are carefully scrutinized for potential risks to avoid the missteps of companies like FedEx and others. Working on a project basis from your home does not make an independent contractor. In any employee-independent contractor review, all information that provides evidence of the degree of control and the degree of independence will be scrutinized. Meeting the requirements set by both the state and federal government to be deemed self employed is no easy task. Specific worker types requiring heavy supervision, little or no specialized education or training and hourly payments is typically viewed as indicative of an employer/employee relationship. If the auditing agency feels the employer company has the right to control the relationship (whether they ever exercise the right or not) the mere fact that it exists is enough to reclassify a worker. Should the agency render a reclassification determination an employer must be named for payment of back taxes, fines and penalties assessed for this error in judgment.
The costs of worker misclassification can be financially devastating to small client companies possibly resulting in financial ruin. Employers looking to avoid the added costs associated with traditional staffing models must look at all aspects of the staffing model beyond the costs and real employer obligations. Take a peek under the hood and kick the tires before signing on that dotted line. Remember, just because you call them independent contractors doesn't make it so.
As early as 2005 through 2007, Blackwater was erroneously awarded 39 separate contracts slotted for small business owners. According to the SBA Blackwater may have misrepresented its worker population and actually did not meet the small business owner requirements outlined in SBA guidelines.
The façade came to light when House Committee on Oversight and Government Reform Chairman Rep. Henry Waxman became suspicious of the security firm and asked SBA to investigate the firm. On July 28 2008, Waxman went public with Blackwater's deceptive hiring irregularities and the agency that knew about it but did not take corrective action. Waxman stated "it appears the company misled contracting officials who in turn chose to ignore all of the warning signs. It is deplorable that no one ever looked out for the interests of the federal taxpayer." Although Blackwater is not accused of breaking any federal laws this case is far from closed as this article states.
In my opinion misappropriation of federal contract dollars earmarked for small business owners are small potatoes compared to a much larger employer hiring practices that teeters at a pandemic level. The mere fact personnel hired by Blackwater were brought on as independent contractors and not employees presents a whole slew of other headaches for the security firm and they have not heard the last from the Feds. With the recent passage of state and federal legislation designed to crack down on employers who intentionally misclassify workers the security firm will need to staff up with an army of lawyers.
The IRS and the states in which Blackwater is doing business in will dig in and undoubtedly be able to prove the workers are indeed misclassified. Their audit findings will yield hefty fines, steep penalties resulting in corporate punishment. Waxman's statement in addition to the Blackwater retort to the allegations will be used as evidence to prove willful and intentional worker misclassification. Perhaps the illegal "got" may not be worth it in the end.
With the talent crunch in full swing many employers including the state and federal government are taking on retirees to help ease the work load while they continue to search for full time employees. The issue at hand is not retirees reentering the workforce but former employees returning to work to perform the exact same job they had prior to exiting the workforce. States are cracking down on a practice termed "double dipping" where workers collect pension benefits in addition to them earning a salary with a current employer/former employer. It is estimated thousands of state and local workers retire, collect pension benefits and then keep working, more often doing the same job they retired from! Although perfectly legal in every state some think it's not fair and want something done about it.
While rehiring retirees may seem to be a great way to tap into an experienced labor pool it may just cost you more in the long run. Time, effort and higher compensation are just part of the overall costs of engaging former workers. When you factor in a staffing agency mark up or take another route and contract directly with the worker the costs jump up significantly. On top of the direct labor costs navigating the independent contractor landmines laden with heavy fines and penalties for misclassified worker can be financially devastating to a company.
Employment practices of this nature are often labeled tax schemes and front and center on the legal stage at all times with no real end in site. State Agencies are leading the charge in the war on independent contractors and employers who use them. The returning retiree more often than not falls into the misclassified independent contractor category. When you combine two very unpopular employers labor practices the bright line leading the auditors straight to your door gets even brighter. You may want to rethink who and how you staff your next job opening
Bottom line the real issues are tax dollars, desperation and nothing more. This bold move by the states to curb retiree usage especially independent contractors in the government sectors through legislation is another clear indication they intend to win this war. Talk about double dipping...
News about a pending bill to stop worker misclassification continues to spread across the nation like wild fire. The bill heavily laden with strict employer requirements, added hiring red tape, severe consequences for those who get it wrong and get caught has many very nervous. The bill known as Employee Misclassification Prevention Act of 2008 (H.R. 611) is the latest attempt by the federal government to stop improper classification of workers as independent contractors and designed to plug the tax revenue drain associated with improper worker classification.
Should the bill pass employers will need to prepare for more than just a larger tax bill. Consequences outlined in the bill range from existing post audit back taxes with heavy penalties and fines, new class action lawsuits, wage and hour violations and a visit from the state auditor to boot! Employers have been sitting on the edge of their chair since the bill was first introduced in May 2008.
The bill includes rules for state auditing agencies by offering a huge incentive for states to step up its efforts to flush out misclassified workers. The incentive comes in the form of a new Department of Labor's (DOL) certification requiring states to prove the effectiveness of its audit programs and promises to be the catalyst the Feds need to drive more aggressive auditing campaigns at the state level.
The take away from all of this folks... the stakes are high and you the employer will not come out on the winning side. With a tax deficit of about $35 billion in uncollected tax revenues and the IRS is convinced a tax drain exists in the misclassification of workers this can only mean one thing. It will be even more difficult for an employer to prove itself innocent of any wrongful doing in any type of an audit.
The state of Michigan went public with the news that it has joined California, Pennsylvania and others along side the IRS in the fight against this underground workforce. Employers who intentionally misclassify workers to save money are being targeted. The IRS is leading the charge and hot on the heels of the misclassified independent contractors and the employers who use them. Michigan is not late to the party but in fact was the first of 29 states to sign a memorandum of understanding with the IRS outlining ways for the state and federal agencies to work together.
According to an unofficial report obtained by the Associated Press yesterday Michigan auditing officials discovered a staggering number of misclassified workers who were paid as independent contractors during an audit.
Although actual dollars in wages of the misclassified workers in the state of Michigan are unknown the Government Accountability Office reports that employee misclassification on the federal level accounted for the underpayment of an estimated $2.72 billion in Social Security taxes, unemployment insurance taxes and income tax and clearly Michigan has contributed to these numbers.
The weight of this scheme has negatively impacted everyone but the employers who got away with it as evidenced by the financial burden bourn by employers who are doing the right thing, workers on all sides and public sponsored programs that faded into the background due budget cuts. The broken independent contractor model is not unique to the state of Michigan but an actual pandemic across the nation. You can't open a newspaper, turn on the news or read my blog without hearing about a number of employer misclassification cases and they continue to stack up.
I think these types of headlines coupled with the lure of the potential revenue dollars as a direct result of huge fines and penalties will be reason enough for these states to maintain the chase. With the tax man pushing at the state and federal level keeping Michigan and the rest hopping may just be the ticket that moves the states in the red closer to the black.
While researching an article I kept bumping into buzz words used heavily in the independent contractor compliance world. In addition to these buzz words I also discovered there are pages and pages filled with industry experts and their credentials with offers of amazing solutions to help employers avoid the land mines associated with usage of the independent contractor. Words like worthy co-employer, co-employment protection, legally engineered program, risk mitigation and employer of record just to name a few.
Industry Lingo:
http://www.answers.com/topic/free-lance-employment-independent-contractors?cat=biz-fin
Solicitations for employer company's looking for a solution provider to help answer questions like "who is after me and why should I care" or simply want to align themselves with a "worthy co-employer" need look no further. It seems the industry is chock full of qualified compliance providers who possess equal levels of experience, industry knowledge and have years of practical experience with helping hundreds of employers to reduce or eliminate its risk! Which solution is right for you?
Know your co-employers! Ask hard hitting questions prior to making your final selection for a compliance provider. Remember, aligning yourself with a "worthy co-employer" will save you time and money in the long run. Asking basic questions related to IC compliance and collection of the documentation as evidence of experience are the first steps in a very involved selection process of a provider. Start by asking baseline questions:
1. How many IC evaluations have you performed?
2. How do you remain current on relevant compliance issues, law and legislation?
3. Do you provide support in an audit with the IRS, EDD or other auditing agency?
4. Have you represented a client in a state or federal payroll audit or worker classification issue?
5. How many agency audits/ have you assisted clients with?
6. What were the results of the audit(s)?
7. Have you ever had a worker classification overturned by a government agency?
8. If so, what was the financial impact e.g., taxes, fines, penalties, etc?
9. What companies do you currently provide evaluation services for and how long have you been providing these services?
10. Can you provide references from your current clients on your compliance process or testimonials regarding your risk solution or audit experience?
For some Pennsylvania employers it may be time to pack up the old kit bag but minus the smile.
The Construction Industry Independent Contractor Act passed Monday by a landslide in a vote of 122-76. This could mean severe punishment of those employers who misclassify workers to avoid paying their share of employer taxes.
Pennsylvania House of Representatives ignored lawmakers who lobbied heavily against imposing such severe penalties citing this extreme form of punishment would only worsen the ailing state's economy. Should the bill become law, some governmental officials predict it may drive jobs to employer friendly states like North Carolina, Tennessee and Virginia.
With union groups backing the measure and the state scrambling to fill empty tax coiffeurs, a passage of the bill into law is not unfathomable. The construction industry is not alone on the list of targeted industries.
The courier industry with the ever popular FedEx case rolling along at lightening speed, the infamous carnage of the software industry and other high-tech entities, I think we will see copy cat bills cropping up all over the country. Heavy users of independent contractors waiting in line for their number to be up may find themselves at the front of the line.
Another update unfolds in the FedEx driver misclassification saga as shareholders take matters into their own hands and file suit against the FedEx board of directors. The plaintiff, Plumbers and Pipefitters Local 51 Pension Fund, alleges FedEx Ground unnecessarily exposed the company to damages through their questionable hiring practices.
The company was initially fined $319 million by the IRS for the 2002 tax year en lieu of classifying their delivery drivers as Independent Contractors while treating them as they were traditional W2 employees. However, after all is said and done, the company potentially may face liability and backtaxes totaling upwards of $2 billion dollars.
A spokesman for the company dismissed the union's lawsuit, calling it frivolous and without merit. Yet, FedEx is currently fighting lawsuits in 30+ states as the result of this dangerous business model. FedEx still refuses to change how it engages these workers and continues to fight sinking more money into the tax dollar battle that has not enjoyed much success.
To date, stocks continue to sink as FedEx continues the battle and the IRS digs their heels in.
