Taxation & Estate Planning

?About Worker Classifications, Contractor Fines and Penalties

By Darrin Mish

If you are an employer it is crucial to understand the definition of 'full time employee' and 'part time employee' and distinguish those from the term 'contractor'. It is the ambiguity surrounding these terms that have led to certain abuses of the tax code. An employer can fraudulently obtain all sorts of tax breaks by manipulating the numbers of their employees. Consequently, the IRS has recently taken special interest in this practice. They have upped the number and amounts of the fines and penalties in an attempt to arrest this behavior once and for all.

Two very high profile cases of abusing the tax code in this way have been that of courier service provider Fed Ex and insurance giant Northwestern Mutual. Fed Ex received a fine of over $300 million whereas Northwestern Mutual was slapped with a fine of over $200 million. Although you might never see fines of this magnitude in your business, you would do well to ensure your business complies with the definition of 'employee' based on the tax code.

In fact, Congress has passed a recent bill that defines the ambiguous terms much more clearly in an attempt to make sure all businesses toe the line in classifying their employees correctly. But what if you are the employee? In such cases, it is your responsibility to ensure that you are classified correctly. If you are in doubt, consult the IRS or a tax attorney. This is a very complex issue and the IRS is sure to be lenient with you, but you do need to ask if you have any reason to believe that you are classified wrongly. The penalties will be far more severe for your employer but you are still expected to know what your classification is.

The problems of worker classification, contractor fines, penalties and more have caused a lot of confusion for both employers and employees. All this while, not enough emphasis has been placed on correct classification of status of workers. Often the employers are to blame because they intentionally classify workers who work more than 40 hours a week as part time employees to avoid paying them full time employee benefits. If you are unsure about how your classification works or if your job exists in a grey area where you are not positive how you qualify, it is extremely important that you contact the IRS or a tax attorney and make sure your employer isn't breaking the law.

?About Worker Classifications, Contractor Fines and Penalties is a post from: IRS Tax Problem Solver Blog - IRS Help

Full post as published by IRS Problem Solver Blog on February 10, 2010 (boomark / email).