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Avoid the DOL and IRS Audit Focus on Independent Contractors

How can you avoid the US Department of Labor or DOL and IRS audit focus on independent contractors and 1099 workers?  What do you need to know about the new definitions of an independent contractor based upon the so-called “Darden Factors” and the “Economic Realities” standards?  Why should you be concerned about employee misclassification as a San Diego employer?

Let’s answer the last question first.  Why should you be concerned?  A recent article in Business Week noted:

“Get ready for an intense new round in the long-running fight over which workers are independent contractors … The IRS is taking a closer look at companies that use contractors.” – Business Week

The IRS itself estimates that 80% of workers classified as “independent contractors” or 1099 workers are actually employees.  The State of California Employment Development Department or EDD believes likewise.  There is no avoiding an EDD audit, as they automatically audit many corporations every 3 years.  What is at stake for the employer is the substantial expense of back wages, payroll taxes and benefits as well as California civil penalties up to $25,000 per employee.  Most employers who are found to have independent contractors or 1099 workers who are misclassified will result in payments of six figures per employee.  This has already put several southern California businesses out of business.  The time to come into compliance is now.

Allen Barron’s integrated legal, tax, advisory and accounting services will help you to analyze your risk and make sound recommendations to bring you into compliance with the new “tests.”  It is much more about the financial relationship between the parties, as well as the nature of the work performed by the 1099 worker or independent contractor.  If your 1099 workers bring in more than 60% of their income from your company, be prepared to have them classified as “employees” resulting in substantial cost.  The EDD, DOL and IRS audit focus on independent contractors will look at the business entity of your independent contractors, how and when it was formed, who payed to start the company and how much of their own investment they have in their business.  In the eyes of these agencies, independent contractors should have income from multiple sources and should have the ability to set the price for their product and control over their own profit and/or loss.

Most San Diego businesses with independent contractors or 1099 workers will face the EDD, DOL and IRS audit focus on independent contractors and 1099 workers.  It’s just a matter of time.  We invite you to contact Allen Barron for a free consultation at 866-631-3470.  Learn about our integrated services and how we can help you to understand your risks and take steps to come into compliance before you face the draconian penalties and costs associated with employee misclassification.