IRS Mounts Major Audit Initiative For "Misclassified" Independent Contractors

The United States Internal Revenue Service has begun its most significant payroll audit initiative in decades. It is planning to "study" a number of companies to check for compliance in the areas of payroll taxes, independent contractor (IC) status, fringe benefits, and executive compensation. Certainly, independent contractors play an important role in the economy, but some companies may be using an IC classification to avoid worker's compensation insurance issues, as well as payroll tax issues, benefit issues, and so on.

In the worker's compensation context, there are a few important things to remember about independent contractors. First, if you retain an independent contracting company that has employees, you must make sure that the company has worker's compensation insurance to cover those employees, or you, and your carrier, may be on the hook for any injuries to those employees. To be sure that the IC has worker's compensation coverage on its employees, obtain a certificate from the Worker's Compensation Board. The number for the Worker's Compensation Board is (317) 232-3808.

If you are utilizing the services of an IC in the construction trades who is a sole proprietor or a partnership and has no employees, the IC is not required to have worker's compensation insurance coverage. However, that IC must get a certificate of independent contracting status. They can obtain this certificate from the State Department of Revenue. Make sure you have a copy of that certificate from the State in your file before you let the contractor on your premises.

What about ICs who are sole proprietors and not in the construction trades? This is a conundrum. There is no certification that you could obtain ahead of time that would give you safe harbor in the event that the individual (or the IRS!) decides that he/she is an employee. If you haven't done so, we would suggest that you check with your business counsel to make sure that the ICs you are working with meet the IRS guidelines for IC status and that you can prove it.

If you have questions about a claim or any of your other worker's compensation questions, please contact Ann Stewart.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.