The Payroll Tax Hike and How It Affects Independent Contractors

A recent article in Forbes by Robert W. Wood discusses the affects of the payroll tax hike on individuals in the coming year, particularly independent contractors. As has been addressed in previous blog posts, the deal that settled the fiscal cliff matter for the moment did not extend the payroll tax holiday that decreased the rate from 6.2% to 4.2% for the years 2011 and 2012.

As a result of the 2% increase, millions of Americans were made aware of their shrinking paychecks—whether they are in business, self-employed, or wage-earners. For many, this decrease is not insignificant. The article notes that for an individual making $50,000, the individual will receive $1,000 less a year.

In regards to how the payroll tax hike affects a particular group, Wood poses the central question of the article, “But do higher payroll taxes mean more pressure on independent contractors?” Wood answers with a “perhaps.” There is no withholding for independent contractors, as the contractor is responsible for withholding his own tax). He concludes that while it is not likely that higher taxes on the portion of the tax the workers pay will serve as motivation for employers to designate employees as independent contractors, there will be some connection.

One of the reasons why the IRS likes employees is because employers have the duty to withhold taxes from employees. The duty to withhold allows the IRS to get its share in a manner that is quicker and more reliable.

This could motivate those who use independent contractors and those with employees to take a closer look at their practices. Does it make sense to fight any reclassification? Can revising or improving a contract make the process easier?

Such questions should certainly be answered before an audit or litigation. A recent report claims that the IRS is losing billions of dollars, and a Department of Labor study reports 30% of employers are classifying workers incorrectly. The article is quick to say that such misclassification will continue to decrease, as measures have been put in place to decrease the practice. In 2010, the Department of Labor announced new regulations that would make filing an analysis for each worker in regards to their classification a requirement, not excluding those individuals who are deemed “independent contractors.” The information that all agencies gather—the IRS, the Department of Labor, state governments—is shared among them, making it easier to regulate.

It is important to note that business owners and other “responsible persons” are personally liable. The IRS is not is not easily swayed by excuses.

If you have any questions regarding payroll taxes, contact an IRS tax attorney for the most up-to-date information.

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Beverly Hills, CA 90212
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