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Why the U.S. government hates the idea of independent contractors

June 6, 2017 By Andrew Smith

Say your business is doing well, and you to need to hire some extra workers.

But you may be terrified of all the obligations that go along with adding a person who must be treated as an employee. So you would prefer to add someone who can rightly be treated as an independent contractor. Good idea!

Unfortunately, the government hates the idea of independent contractors, and the IRS has skirmished with businesses for decades about the so-called worker classification issue. Here’s what you need to know about the subject.

Worker classification matters

When a worker is classified as an employee of your business, you generally must withhold federal income tax and the employee’s share of Social Security and Medicare taxes from the worker’s wages. Your business must then pay the employer’s share of Social Security and Medicare taxes, pay federal unemployment tax, file federal payroll tax returns, and follow lots of burdensome IRS and Labor Department rules. You may also get socked with state and local unemployment and worker compensation taxes and have to comply with even more rules and regulations. Dealing with all this stuff can cost thousands of extra dollars a year for each employee.

On the other hand, independent contractor status is beneficial to a business because you don’t have to worry about employment tax issues, and you don’t have to provide expensive fringe benefits like health insurance, retirement plan contributions, and paid vacations.

Keep reading this article at: http://www.marketwatch.com/story/why-the-us-government-hates-the-idea-of-independent-contractors-2017-05-23

Filed Under: Contracting Tips Tagged With: DOL, Form SS-8, independent contractor, IRS, worker classification

Bad-faith federal litigation tactics compel court to award small business attorneys’ fees

December 1, 2016 By Andrew Smith

Even though the federal government maintains an entire agency whose mission is purportedly to assist small businesses — the Small Business Administration (SBA) — regulators seem ever oblivious to their impact on entrepreneurs. The National Labor Relations Board’s (NLRB) effort to redefine who is an “employer” and the NLRB’s and the Department of Labor’s (DOL) enmity toward independent contracting are two current examples. A third is DOL’s so-called Fiduciary Rule, which hits sole-practitioner and small-business investment and insurance advisors especially hard.

Small businesses are also at a particular disadvantage when disputes with the government end up in court. A recent U.S. Court of Federal Claims decision, SUFI Network Services, Inc. v. US, exhibits government’s unfortunate willingness to exploit its power in disputes with a small business and the role courts can play in protecting entrepreneurs’ rights.

SUFI contracted with the U.S. Air Force (USAF) in 1996 to be the exclusive long-distance-call service provider for the guest lodging facilities on Air Force bases in Germany. Over the next 8 years, USAF personnel made it impossible for SUFI to successfully offer services.

For example, calling cards were provided to guests to circumvent SUFI’s service. Also, requests by SUFI that government phones be removed from the facilities were repeatedly ignored. SUFI declared that the USAF had committed a material breach of the contract and ceased services in August 2004. As required by the contract, SUFI filed a claim with its contracting officer for $130 million in damages. The officer awarded $133,000.

Obviously dissatisfied, SUFI appealed to the Armed Services Board of Contract Appeals (hereinafter, Board), increasing its request to $163 million.

Keep reading this article at: http://www.forbes.com/sites/wlf/2016/11/25/bad-faith-federal-litigation-tactics-compel-court-to-award-small-business-attorneys-fees/#14f0203f1f35

Filed Under: Contracting News Tagged With: abuse, Air Force, Armed Services Board of Contract Appeals, bad faith, Board of Contract Appeals, contract dispute, Court of Appeals, Court of Federal Claims, DOL, Fiduciary Rule, frivolous action, independent contractor, litigation, NLRB, SBA, small business

Limitations on subcontracting: 1099 contractor’s work didn’t count

June 11, 2014 By ei2admin

Under the FAR’s limitations on subcontracting clause, the work to be performed by a 1099 independent contractor did not count toward the prime contractor’s performance.

In a recent bid protest decision, the GAO held that a procuring agency properly rejected an offeror’s proposal because the offeror was relying, in part, on an independent contractor to meet its obligations under the limitations on subcontracting clause.

The GAO’s decision in MindPoint Group, LLC, B-409562 (May 8, 2014) involved a Department of Justice solicitation for information technology infrastructure support.  The proposal was issued as a set-aside for Economically Disadvantaged Woman Owned Small Businesses (EDWOSBs), and incorporated FAR 52.219-14, the standard limitation on subcontracting clause.  For a services contract, FAR 52.219-14 requires the EDWOSB to perform at least 50 percent of the cost of contract performance incurred for personnel with its own employees.

MindPoint Group, LLC submitted a proposal.  MindPoint’s proposal stated that MindPoint would self-perform 53.3 percent of the contract effort using seven individuals, including an individual designated as the “Systems Administrator MS.”  However, MindPoint’s proposal included a letter of commitment stating that the Systems Administrator MS would be an “independent consultant,” and MindPoint’s price proposal referred to the individual as a “1099 Consultant.”

Keep reading this article at: http://smallgovcon.com/gaobidprotests/limitations-on-subcontracting-1099-contractors-work-didnt-count/

Filed Under: Contracting Tips Tagged With: 1099, bid protest, DOJ, EDWOSB, FAR, GAO, independent contractor, limitation on subcontracting, subcontracting, woman owned business, wosb

IRS ‘contractor’ study raising big concerns

June 14, 2010 By ei2admin

The Internal Revenue Service has launched a hard look at how companies count contractors and full-time employees, prompting business advisers to urge companies to take a look before the revenue service does.

“I’m guessing the use of independent contractors and contingent workers has expanded a lot in the last 25 years,” said Mike Abcarian, an employment law attorney at Fisher & Phillips in Dallas. “For the IRS this is an issue of a lot of money not finding its way to the federal government.”

The study, which began in March, will involve three years of intensive audits of businesses and workers, and will be used to help the IRS determine the difference between how much tax it collects and how much goes unpaid, said Clay Sanford, an IRS spokesman.

The study will also be used to look for tax cheats on both sides of work arrangements, Sanford said.

An IRS program manager told industry publication Tax Notes Today that 20 Texas companies are part of the first wave of companies being studied, despite the companies being randomly selected. The IRS manager was not immediately available for additional comment.

Speed bump for growth

The study comes at a hard time for businesses looking to grow and be flexible during a stop-and-start recovery.

“A lot of employers are looking for ways to be more efficient,” Abcarian said. “If you use independent contractors, you can price your product lower because you have less administrative costs.”

Add in the prospect of additional health care costs tied to regulatory reform, and government changes are giving companies even more reason to avoid new hires, said J.R. Gonzales, former president and CEO of the U.S. Hispanic Chamber of Commerce.

“The economy’s not making it any easier (to hire), and more restrictions will make it more difficult,” he said.

Independent contractors are concerned, too.

“When you’re looking for a flexible work force this is an ideal situation,” said David Dunnigan, executive director of the Dallas-based Coalition for Independent Contractor Freedom. “In many cases, you can make more money as an independent contractor because there’s not a ceiling there.”

If the IRS redefines how contractors are classified, that flexibility and upside for entrepreneurial contractors could be challenged, he said.

A more aggressive IRS

Fundamentally, it’s easier for the IRS to collect employment taxes from companies and their full-time employees, Abcarian said.

That creates a bias in the IRS toward counting workers as employees rather than contractors, said Jim Smith, an accountant with Smith Jackson Boyer & Bovard PLLC in Dallas.

“They are increasingly auditing (small and mid-sized businesses) that are reporting a large number of contractors,” he said. “It’s not a program, it’s a pogrom,” Smith said.

If a company has accidentally misclassified full-timers as contractors, it should simply correct that mistake, said the IRS’ Sanford. But if a business has “no reasonable basis” for misclassifying a worker, it can be held liable for all the workers’ employment taxes, not just the portion typically paid by the company.

Companies could also face penalties and interest. In extreme situations, a company could face class action lawsuits on behalf of misclassified workers claiming they haven’t been properly paid for the hours they’ve worked, Abcarian said.

He said he expects to see a more aggressive IRS even before the study is done, and businesses should get ready.

“This is a very appropriate time for employers to do their homework in terms of classification of employees to be sure they’re doing it right,” he said.

— by Chad Eric Watt – Staff Writer – Dallas Business Journal -Friday, June 4, 2010  |  Modified: Saturday, June 5, 2010

Filed Under: Contracting Tips Tagged With: employment law, independent contractor, IRS, small business

Auditors crack down on ‘independent contractors’

April 2, 2010 By ei2admin

If your business uses independent contractors, get ready for new scrutiny. Hoping to boost tax revenue, the IRS and many state governments are cracking down on how companies classify their workers.

When employers report wages for independent contractors on IRS form 1099, rather than a W-2, they aren’t required to pay unemployment insurance, worker’s compensation insurance or payroll taxes for them. But the rules governing which workers are genuinely “independent” are strict — and often flouted.

The Internal Revenue Service launched a program last month that will randomly examine 6,000 companies over the next three years for employee misclassifications. The federal government estimates it will raise $7 billion over the next 10 through tighter enforcement.

The IRS audit program is just the beginning of what will be “a new era of compliance,” says Gene Zaino, president and CEO of MBO Partners,  a services firm that specializes in the independent contractor market. “Most states are now sharing data with the IRS, and many have set up task forces specifically [to address] misclassification. It used to be that if a business ran into trouble with a state labor department or with the IRS, the issue was isolated. Now, any kind of audit or compliance finding can set off a domino effect where the other agencies will get in on the action. ”

Getting audited can be scary even for businesses that keep everything by-the-book. Chris Daly, co-owner of Kinespirit fitness studios in New York City, got an audit notice in January from the New York State Department of Taxation’s Unemployment Insurance Division, which wanted to probe Kinespirit’s use of contractors. Like more than 30 states, New York has run out of money in its unemployment compensation fund and is borrowing from the federal government to keep paying claims.

“We knew we were doing it right but that doesn’t mean we weren’t concerned,” Daly says. “We understand the situation states are in; unemployment insurance is a needed tool, and we understand the need to fund that tool. And there are companies out there that don’t want to fund their share.”

Kinespirit classifies its managerial and administrative staff as employees and its fitness trainers and instructors as contractors. The audit process was exhaustive, but the company emerged clean.

Following the rules: So what’s the correct definition of an independent contractor? It depends on who you ask.

Some business advisors say a true independent contractor is employed by a separate corporation or legal entity, either one they own or a third-party firm. That rules out freelancers who don’t formally set up a business structure to house their 1099 income.

But hewing to that definition didn’t work for Mega Builders, a Chicago-area construction company that got hit with a $328,500 state fine in December on the grounds that it had misclassified 18 of its employees as independent contractors. The company allegedly forced its workers to incorporate, even though they didn’t operate bona-fide businesses, says Jeffrey Risch, an attorney familiar with the case and a partner at the St. Charles, Ill., firm SmithAmundsen.

In his audit, Daly says the state examiners seemed most interested in whether his so-called independent contractors were able to control their own schedules and the manner in which they perform their work.

But for 352 Media Group,  a Gainesville, Fla.-based Web development firm that recently reorganized the way it handles independent contractors in order to ensure compliance, one of the important issues was where the work is completed and who owns the equipment used.

“We used to have contractors working in our office on regular schedules and using our equipment, which was cause for concern,” says Geoff Wilson, 352’s president and CEO. “Thankfully, when we hired a new HR director, she discovered this problem and worked with our contractors to either convert them to employees or make sure they were doing the proper things to maintain their contractor status.” That included using their own equipment, working out of their own home or office and taking on jobs for other clients.

While the IRS publishes guidelines for determining worker classification, the IRS factors are “similar, but not identical, to tests relied upon by other agencies, such as worker compensation and unemployment insurance agencies,” says Susan Bishop, attorney at Campbell, Calif.-based Pratt & Associates.  “Factors from all applicable agencies should be considered when making a decision.”

If you’re not sure whether your independent contractors are properly classified, review the appropriate guidelines from your state and the IRS, or — better still — consult a local tax attorney or accountant to help you sort it out. You can request a determination by the IRS by filing Form SS-8, Bishop notes. Third-party firms like MBO Partners also advise employers on contractor issues for negligible fees.

Like Mega Builders, firms that are audited and found to be incompliant can face steep fees. The best course of action is to examine your worker classifications now, before a government entity gets involved.

“Using contractors offers a lot of benefits, but you have to make sure you’re doing it right,” says 352 Media’s Wilson. “You don’t want the government to come calling and decide you owe a lot of back taxes for classifying contractors incorrectly. Be vigilant about reading the government’s contractor classification guidelines and make sure your contractors actually fall within them.” To top of page

– by Nancy Mann Jackson – CNNMoney.com – Mar. 29, 2010

Filed Under: Contracting Tips Tagged With: independent contractor, IRS

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