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
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!