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IRS Looking Closely at Independent Contractors

July 27, 2012

The Internal Revenue Service is casting a skeptical eye on many companies’ attempts to classify employees as independent contractors.

“They focus on the withholding, the FICA taxes, Medicare taxes,” said Avery E. Neumark, partner-in-charge of the Employee Benefits and Executive Compensation Practice at Rosen Seymour Shapss Martin & Company LLP, during a New York State Society of CPAs conference Thursday on taxation for individuals. “They’re drilling down on compensation, on withholding. They come prepared and they do their work. These agents can have files with a tremendous amount of documentation.”

It’s not only low-level staff who can be the subject of such audits. High-level executives can also come under scrutiny. Neumark warned about golden parachute issues. “If you take an excess parachute payment, there’s an excise tax on the employer and on the executive,” he cautioned. “They look at non-cash fringes like housing, loans, gross-ups to cover certain tax payments they have to make. There’s a lot going on here that the agents are looking at.”

Avery Neumark

Neumark noted that accountants can do planning for their clients, helping them update their processes and procedures. He advised checking the payroll system for temps, alternative workers and contingent workers.

“When you have a contract with someone that says they’re going to be treated as an independent contractor, that is not enough,” he said. “You have to drill down. The contracts are getting more specific. You have to look at the written documents and at the actual work.”

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