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Audits Coming: Watch Out, Mis-Classified 1099s

In February, the IRS will conduct 6,000 random audits of companies looking for all sorts of tax violations, but mostly, CFO Daily reports, they’ll be targeting misclassified independent contractors.

When a worker who should be classified as an employee is instead classified as a contractor or a freelancer, states & the Feds lose out on taxes, and workers lose out on employee benefits.

But if you sign a contract saying you’re a contractor, doesn’t that make you one? Not entirely. To be a true independent contractor, you must be, well, independent. The IRS says that you, a freelancer, are really independent if the employer doesn’t control the way the work is done or the way you run your business.

Warning flags include an “independent contractor” who has just one client, who works on-site, and who performs the same work as full-time employees.

For the most part, turning misclassified 1099 workers into employees is good for the employees—they’ll get benefits, become covered by certain employment laws (governing medical leave and discrimination, for example), and pay less in taxes.

But a company found to have been misclassifying workers (it is cheaper to have an army of freelancers, after all) may just dump all its freelancers. We’ve heard this happened recently to Massachusetts-based freelancers who worked with one major publisher after it was audited by the Department of Labor looking for misclassifications. (Why just Massachusetts? Because of a high-profile case there where a company was busted.) So in the short term, freelancers do lose out when they find their source of work has dried up.

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