Facing a multibillion dollar employment tax gap, the Internal Revenue Service is preparing to focus increased attention on whether workers are classified as employees or independent contractors.
According to a February report released by the U.S. Treasury Inspector General for Tax Administration, the IRS plans to develop an agency-wide enforcement program designed to ensure businesses are properly classifying their employees. The report does not list a timetable for the program.
Recent IRS data states that the current employment tax gap is $54 billion. Of that, an estimated $1.6 billion (3 percent) comes from employee misclassification.
The enforcement program will be developed by the IRS Director, Specialty Programs, Small Business/Self-Employed Division coordinating with each IRS business office, the Criminal Investigation Division and the Office of Chief Counsel. In addition, the director will work with researchers to conduct a study to address worker classification and other employment tax issues.
Worker misclassification is a serious issue for businesses and workers. Many employers classify employees as independent contractors to avoid paying employment taxes, unemployment insurance, and benefits.
While the unified enforcement program is new, the IRS has been cracking down on misclassifications for years. Other initiatives the IRS uses include:
Form SS-8. Workers or employers can submit this form in order for the IRS to determine whether a particular worker is classified correctly.
Form 8919. Contractors that discover that they are actually employees (by either filling out a form SS-8 or receiving information from the IRS) can file a form 8919 and report only half of their employment taxes. Their employer pays the other half.
The report also states that the IRS is planning to investigate the possibility of modifying Section 530, which allows employers to treat certain workers as independent contractors that would otherwise be considered employees.
