IRS Controversy: Are Blurred Lines Between ‘Employees’ and ‘Freelancers’ Setting Taxpayers Up For Disaster?

Ask any business owner what the worst part of his job is, and most of them will tell you that it’s

dealing with the IRS. The IRS consistently makes life difficult for business owners – requiring extensive

paperwork, onerous reporting, and threatening huge financial penalties for even honest mistakes.

Unfortunately, there is yet another area of tax law that is beginning to cause even more problems

for business owners – and that is accounting for the emergence of the “freelance economy.” Many

businesses employ independent contractors. Millions of Americans consider themselves freelancers.

And all of them could find themselves embroiled in a tax nightmare. As a recent CNBC article reports:

Recent research, conducted by Edelman Berland and commissioned by the Freelancers Union

and Elance-oDesk, estimates that 34 percent of the American workforce, approximately 53

million Americans, are doing some type of freelance work. And this likely doesn’t fully count all

independent contractors, including the approximately 22 million one-person small businesses

around the country.

However, while the work landscape has and will continue to evolve, the government-affiliated

groups like the IRS that define who is considered an employee have not. That means that there

is a disconnect between people who consider themselves independent and the businesses that

engage their services on one hand, and the tax and paperwork implications of the IRS definition

of what is an independent worker on the other hand.

“1099” workers are those considered independent by the IRS. “W-2” employees are those they

consider employees. However, for many freelancers, small businesses and their temporary

employers, the definitions often don’t match. Moreover, this distinction can end up being very

costly, both in penalties from miscategorizing contractors and freelancers, as well as from the

opportunity cost of not bringing on freelancers or service providers that may subject a business

to categorize them as employees and the extra work associated with doing so.

Per the IRS, “Generally, you must withhold income taxes, withhold and pay Social Security and

Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally

have to withhold or pay any taxes on payments to independent contractors.”

Naturally, very little about the tax code is clear on this subject. Millions of business owners and

independent contractors are left trying to figure things out for themselves and hoping they don’t make a

mistake.

If you own a business, or if you’re an independent contractor, please contact us immediately to discuss

the tax implications. It’s important that you take action now to avoid the potential for a nasty IRS

dispute down the road.

If it’s too late, and you find yourself stuck in an IRS tax controversy, don’t despair. We can help. We

will represent your interests to the IRS and get their aggressive revenue officers off your back. An IRS

dispute can ruin your life… but it doesn’t have to. Please contact us today to learn more!