Some Massachusetts businesses that hire independent contractors may soon find themselves in hot water with the IRS.
The Massachusetts state government has entered into an agreement with the IRS to crack down on businesses who wrongly classify workers as independent contractors instead of as traditional employees.
Employers do not have to pay the same Social Security and Medicare taxes for independent contractors as they do for traditional W-2 employees.
Many businesses make honest mistakes when they classify employees as independent contractors. Some, though, intentionally misclassify employees in an attempt to avoid paying taxes.
Either way, employers who are found to have wrongly classified their workers will face stiff penalties. They will be required to pay all back taxes, along with interest and penalty fines. They may also face civil actions from their misclassified employees to recover back pay and other benefits.
According to IRS estimates, nearly 80 percent of independent contractors are improperly classified. Although employee misclassification can occur in any field, the construction industry tends to receive the most attention.
IRS is Offering Amnesty For Self-Reporting
In advance of the enforcement push, the IRS is giving employers an opportunity to come clean, resolve their tax controversies and avoid many of the penalties that come with getting caught.
Employers who choose to participate in the IRS’s “Voluntary Classification Settlement Program” can avoid the interest and penalties that normally come as a result of misclassification. Instead, participants will be required to pay a fraction of the back taxes owed over the past year. They may also be able to avoid an IRS audit on the grounds of worker misclassification.
Voluntary participation may not be right for every employer, though. Some experts worry that it could open employers up to a host of other legal issues, including legal action from the U.S. Department of Labor.
If you are a business owner who is worried you may have misclassified your workers, talk to a Massachusetts tax law attorney who can help you understand your options.
Source: Business Management Daily, “Feds Launch Contractor Crackdown, Offer Amnesty Deal