Volume 12 Issue 6 -- November/December 2008
Volume 12 Issue 6 -- November/December 2008
In the last
issue of this newsletter ("Is
the IRS Targeting Latino Businesses?")
we discussed Haz Panico and his sole proprietorship Haz Drywall which received
very questionable IRS audit treatment.
In addition to the dubious
audits which may be targeting small Latino businesses, there are other weapons
in the arsenal of the IRS. In an earlier newsletter (“Backup
Withholding (Hernando’s Horrors)” we considered the IRS use of
No-Match Letters (CP-2100) and backup withholding.
Another tool in the IRS arsenal
is the employment tax audit. Employment tax audits consist of the IRS auditing a
business to see if the workers are employees or independent contractors (IKs).
In the case of employees,
employers are required to withhold tax on the employee’s wages as well as to
collect and pay additional employment tax amounts for Social Security and
unemployment compensation. In the case of IKs, however, there is no withholding
and the IK is responsible for making quarterly estimated tax payments as well as
paying Self-Employment Tax for Social Security.
The IRS has published a 20
question list that it uses to determine whether a worker is an employee or IK.
No one question or response is
determinative and in close situations the employee status is hard to determine.
For example, some workers move frequently from one drywall company to
another, as well as moving from state to state.
Are such workers independent? Usually,
there are no fringe benefits or no traditional employee benefits.
In the situation where a worker,
say Jose, works only for Haz Drywall, the status issue may be easier to resolve.
The status of Jose as an employee is more clearly defined if Jose is
required to wear a uniform, reports to work at the same time each day, etc.
The problem the IRS seems to
have with employment tax audits is the manpower (or womanpower) needed to
complete such audits. Employment tax audits are very labor intensive and require
the IRS auditor to look at each employee/worker for each quarter.
Then the IRS must compute the applicable additional withholding (941) tax
for the company after examining the status of each worker, because Jose may have
been a bona fide IK from January to June and then become an employee for the
rest of the year.
One of the issues which bothers
small businesses, both Hispanic and otherwise, is losing workers as a result of
a conversion from independent contractor to employee status. The business’s
ability to continue may be greatly impaired.
In some situations, Jose may
suspect that Haz is collecting the employee withholding and not remitting the
funds to the IRS as Haz should be doing. If
Jose has been receiving gross amounts of compensation for years and there is a
sudden reduction in his take-home amount, Jose may simply leave and seek work
It should be remembered that
many tradesmen speak English as a second language.
Trying to explain the status of workers and complex tax rules is daunting
in English and, naturally, more difficult in a second language.
What should/could Haz do?
In the past when some businesses
were unable to obtain workers unless the workers were paid cash on the spot, no
CP2100 notices of possible payee name/TIN discrepancies were issued or
employment tax audits initiated. The
IRS effectively acquiesced in situations where the only way workers could be
obtained to pick up the trash were if the workers were paid cash each day
without any withholding. Whether Latino business owners can succeed in making
the same argument today is questionable.
The ultimate effect may be that
Hispanic workers will be forced to become part of the taxpaying system. The
Washington Post has run articles about how some initially illegal Latino
immigrants were eager to begin paying tax so that they could become part of the
taxpaying system for purposes of obtaining a green card and eventually
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