We`re writing to alert you to a potentially serious audit threat to many businesses that have work done by outsiders. The Internal Revenue Service may take the position that a worker treated as the independent contractor of a business is in fact its employee.

          If the IRS wins, the target business could face a huge bill for back taxes: Social Security (the employee`s share that the employer should have withheld and the employer`s share), FUTA taxes, the income tax that the company should have been withholding from the worker`s pay, and maybe penalties and interest as well. And chances are good that the state will jump in and claim its share, too. The more "misclassified" workers who are involved, the bigger the potential take for the IRS. That is precisely why the Internal Revenue Service has stepped up its audit efforts in this area, allocating more than 20% of its enforcement budget to aggressive pursuit of this issue.

          How can you tell an independent contractor from an employee? The answer to this question depends on a number of factors and may be quite complex. Control of how and when a worker gets the job done may or may not be the most important factor, depending upon the situation. For example, the Service has ruled privately that individuals hired to photograph specific events are employees even though the individuals supplied their own tools and weren`t supervised by the firm that paid them.

          Some workers are employees no matter how little or how much they are supervised. Others are independent contractors no matter how tightly a business controls them. Still others will be grouped in one or the other category depending on 20 factors that the Internal Revenue Service will naturally interpret to its best advantage. Finally, whenever there are rules, there are exceptions. Some of these exceptions actually can get a company off the hook even if it has misclassified workers as independent contractors.

          If you have workers who are being treated as independent contractors, we urge you to give our office a call. We can come in and do an audit of our own to tell you if there`s a potential problem (and if so, what you can do about it). In fact, after we go through your records, we may find that some of your workers are actually independent contractors who have been misclassified as employees!

Hip Hip Hooray!

          We completed and passed a quality review program. Firms of American Institute of Certified Public Accounting members active in public practice are required to participate in a practice monitoring program where a special reviewing CPA firm reviews a CPA firm like ours. This program helps to insure the quality of the profession.

Self Employment Checklist

          If you are contemplating the leap into the great unknown whereby you go from being a succored employee to the self-contained self-employed here is a checklist of items to consider:

While still an employee:

• Sign up to continue your employerՀs health insurance-then investigate cheaper alternatives.
• Get a home equity line of credit.
• Replace employer-provided term life insurance.
• Add individual disability insurance.
• Decide whether to have your 401(K) plan rolled into an IRA
• Review noncompete agreements. Make sure you can legally work for the clients you are counting on.

Before opening your home office:

• Add riders to homeowner`s insurance to cover business property and property owner`s liability for business-related accidents.
• Consider whether you need other kinds of business liability insurance.
• Check local zoning restrictions on home businesses.
• Register for local business licenses and taxes.
• Open a separate checking account.
• Get software to track business expenses.
• Start saving receipts for items that may now be deductible, ie. professional dues, publications, entertainment, utilities and repairs. Get IRS Publication 334 (small business), 463 (travel and entertainment), 535 (business expenses), 560 (Keoghs and IRAs), 587 (home office) and 917 (car expenses).

When the money starts coming in:

• Make estimated tax payments; don`t forget the 15.3% Social Security/Medicare Tax on self-employeds.
• Make sure any subcontractors will not be considered employees by the Internal Revenue Service.

          If you have any questions about these tax notes or any other matters, please call us.