Internal Revenue Service auditors showed up with little warning at Brian Robinson’s staffing firm in Atlanta a year ago, seeking to verify that a dozen outside contractors he had hired to handle his information-technology services weren’t, in fact, full-time staffers.
The audit was part of a government crackdown on employers who misclassify workers as independent contractors to avoid paying payroll taxes, and other employment-related expenses.
TRC Staffing Services CEO Brian Robinson says that the legal distinction between full-time staff and independent contractors can be very confusing for many employers.
Mr. Robinson says the auditors ultimately found that his 30-year-old family business, TRC Staffing Services Inc., with its 100 permanent employees and up to 20 temporary workers, was in the clear. But he says the audit was “nerve wracking” because tax law doesn’t make it easy to distinguish between full-time staff and independent contractors doing full-time work. He says the legal distinction can be confusing even for an employer with his decades of experience in the labor market.
The appeal of using outside workers is growing as many small businesses struggle to stay lean. Some employers also are turning to contractors to avoid hitting the 50-employee threshold that would require them to pay for employees’ health insurance, starting next year, under the federal health-care law, or pay a penalty.
State studies have shown that local businesses misclassify anywhere from 10% to more than 60% of their workers as independent contractors. Many business owners blame the complex tax code, which doesn’t offer black-and-white standards for telling the difference. The distinction is based on the employer’s degree of control over a worker, the length of the relationship and a series of other factors. But such factors are open to interpretation. Past court cases on the issue have