Worker or contractor? U.S. businesses get it wrong: IRS watchdog

WASHINGTON Mon Jul 29, 2013 4:49pm EDT

WASHINGTON (Reuters) - U.S. businesses are avoiding millions of dollars a year in federal tax payments by improperly listing employees as independent contractors, despite an Internal Revenue Service program designed to resolve the uncertainty, the agency's watchdog said in a report on Monday.

Businesses do not pay employment taxes for independent contractors, such as consultants and freelancers, who are hired for temporary jobs.

Workers wrongly labeled as independent contractors add to the $385 billion "tax gap" of taxes owed to the U.S. Treasury but not paid, said the Treasury Inspector General for Tax Administration (TIGTA) in its report.

The IRS has a program to resolve independent contractor questions. A business or employee can request an IRS ruling for the work status of an independent contractor or worker.

Businesses often are not complying with IRS rulings that require them to classify a worker as an employee and not an independent contractor, the watchdog said.

"This problem adversely affects employees because the employer's share of taxes is not paid and the employee's share is not withheld," said Russell George, head of TIGTA, in a statement.

"If left unchecked, the problem will continue to deprive the federal government, and the American people, of millions of dollars in lost revenue every year," he said.

TGITA made four recommendations for the IRS to improve businesses' compliance in identifying workers. The IRS said it agreed to implement all four recommendations.

(Reporting by Patrick Temple-West; editing by Howard Goller and David Gregorio)

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Comments (1)
pdutton wrote:
“This problem adversely affects employees because the employer’s share of taxes is not paid and the employee’s share is not withheld,” is a completely stupid statement for at least three reasons:

1) “The employee’s share is not withheld” – Well, yes, but how is that a problem? As an independent contractor, I pay my estimated taxes quarterly. It’s at most a minor inconvenience, and certainly doesn’t affect IRS revenues, as I still have fill out my tax forms by April 15 like anyone else regardless of whether my taxes were withheld.

2) “The employer’s share of taxes is not paid” – This is an absolute lie. I pay these taxes. I, as my own employer, am responsible for the “employer’s” share of taxes, as is every other independent contractor.

3) “This problem adversely affects employees” – This is a sweeping generalization, which in my case, is not at all true. I do not feel adversely affected. Yes, I forgo some employee benefits (e.g. health insurance), but I do it in return for benefits which I value much more (e.g. a completely flexible work and vacation schedule).

What I am adversely affected by is the TIGTA. For right now at this very moment the IRS is forcing the company I contract for to terminate this arrangement that we both are happy with. At least they are willing to take me on as a full-time employee, an offer I will consider despite that it looks to entail a pay cut (to pay for benefits I neither need nor want), stricter hours, and much less vacation time. My choices in the matter apparently mean nothing to Mr. George.

Or I could just choose to not work and live on my spouse’s salary. Which would certainly deprive the federal government of revenue. So it’s possible that the IRS would make that illegal, too…

Aug 02, 2013 3:29pm EDT  --  Report as abuse
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