For many small business owners the mistake of misclassifying employees as independent contractors (IC) can be a costly one. When one factors the interest and penalties for not withholding taxes, it can cost some small business owners the business itself. The IRS is focusing more efforts on ensuring compliance with the laws regarding employees and IC’s including partnering with states to share payroll tax data, better matching programs that will match Form 1099’s with payments, and increased audits of payroll data.
From the employee/IC side of things, any taxpayer that may think that an employer is misclassifying them as an IC can file Form 8919 with their tax return. This will allow the taxpayer to avoid paying self employment tax on their earnings. Check with your tax advisor for details of who an employee is versus and IC.
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