Who is More Susceptible?

The Internal Revenue Service is trying to recoup about $14 billion in revenue that they estimate companies underpay in the employer portion of employment  taxes each year.  The IRS is planning a three year campaign to audit approximately 6,000 businesses.  The government is strapped for funds and will therefore focus on:  worker classification, fringe benefits, and reimbursed expenses.

The selection of the audited companies will be random and will target large, medium and small companies.  Your company may be a target for the IRS and likely have these three issues:

Worker Classification

In hard times there is a tendency to hire non-employees or independent contractors.  Determining who is and who is not an employee is a difficult task for the IRS.  If the government classifies the independent contractor as an employee, a liability for back payroll taxes, including penalties & interest, plus back benefits such as health & 401k can be triggered.

Facts that provide evidence of the degree of control and independence fall into three categories:

1. Behavioral Control - Does the company control or have the right to control what the worker does and how the worker performs their job?
2. Financial Control - Are the business aspects of worker's job controlled by the payer?
3. Type of relationship - Do written contracts or employee type benefits exist?

Fringe Benefits

Whether it is cell phone usage, health insurance, educational, vehicle usage, etc., the government is looking to be sure they are collecting their portion of income taxes and employment taxes related to personal usage.  A systematic and consistent policy documenting personal use is important in order to substantiate the taxpayer's position.

Reimbursed Expenses

The reimbursement of expenses to employees should be administered through an accountable plan or nonaccountable plan.  Amounts paid under an accountable plan are deductible by the employer and not reported as income on the employee's W-2.  However, under the nonaccountable plan amounts paid are deductible by the employer and are included as income on the employee's W-2.

A plan is accountable if it satisfies three conditions:

1. Expenses covered under the plan must have a business connection
2. The plan must require employees to substantiate covered expenses
3. The plan must require employees to return advances in excess of covered expenses

The rules for worker classification, fringe benefits and reimbursed expenses can be tedious and time consuming and, sometimes, difficult to understand.  If you need any assistance regarding this matter, contact Barry Schimler at 678-741-2510 or bschimler@bspj.com to talk with someone who can help bring this and other issues into perspective for your business.