THE focus of an audit is whether independent contractors should actually be treated as employees. The unpaid taxes for misclassified employees include income taxes, federal unemployment, and FICA withholding and you are on the hook.
Here are some TIPS of what you can do now to help mitigate from worker classification audit:
• If you are confused if a worker is an employee or an independent contractor, complete Form SS-8 prior to or at the onset of services. Either the business or the worker can file the Form SS-8 with the IRS to determine the worker status. This should be considered at the onset of services and NOT months or years later.
• Document why a worker is treated as a contractor. Does the contractor offer the same services to other businesses?
• Keep competitive bids on file as part of the selection process of independent contractors.
• Independent contractor agreement must be in writing and should specify: maintain own equipment, supplies, software, or pay his own business expenses; scope and timing of work; independent work hours; goals to accomplish; timeline; deliverables; terms of payment; tax obligations, etc.
• For each contractor, maintain duly completed and signed Form W-9 with full name, social security or employer identification number, and address.
• Maintain a copy of independent contractor’s business liability insurance. If the independent contractor have employees also maintain a copy of workers’ compensation coverage for its workers.
• Obtain a copy of current professional license.
• Require regular submission of invoices per project and progress billings. There should be no indication of time cards or time sheets. But instead require submission of bids in the performance of each project.
• There should be no indication that the independent contractor is part of the company benefits such as medical insurances, sick leave, expense reimbursements, etc., which a business usually provides to its employees.
• Refrain from paying advances or loans to independent contractors instead pay on per progress billings.
• Maintain independent contractors files separate from employee records.
• Independent contractors files should include: 1) Form W-9; 2) Contracts and bids; 3) current business or city license from where the contractor is operating; 4) Business liability insurance and workers’ compensation insurance certificate; 6) current professional license; l5) Documented times when work was turned down by the worker.
• File Form1099 timely. This is a key to Section 530 relief and access to the Classification Settlement Program.
• Require the independent contractor to file the appropriate tax returns.
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Al-os & Associates Accountancy Corporation provides accounting and tax services to individuals, corporations, LLCs and business entities. The Firm has a niche in defending.