In today’s evolving business world, one of the ways that some small business owners are saving money and improving the competitiveness of their business is by hiring contractors instead of employees. Contractors take care of their own taxes and insurance, they (presumably) are good at their work, and business owners don’t have to keep them on if there isn’t work for them to do. All in all, contractors can make good business sense.

The IRS agrees… to a point. They believe that some business owners are circumventing their responsibilities by filling roles with contractors when they should be filled with employees. The result? A worker classification audit by the IRS to ensure that each business owner is correctly playing the taxes they should be paying (on employees) and not avoiding those taxes (by calling them “contractors” instead).

Moreover, the IRS may run this audit at the same time as a tax audit or it may choose to perform a tax audit afterward, if it feels that there are unpaid taxes to be found.

What is frustrating is the lack of clear rules around what the IRS considers a “legitimate” reason to have a contractor instead of an employee. The rules aren’t always clear. In fact, this Inc. Magazine article by Matt Quinn tries to outline the guidelines the IRS has in deciding whether or not the roles they are investigating should be filled by employees or contractors and it’s clear from the article that it’s not clear to the IRS! (Read the article here).

Check out Quinn’s step-by-step suggestions and make sure you’re ready because the IRS is coming. They’re randomly selecting 6,000 businesses to audit. I believe that if they find enough businesses that are breaking their poorly defined rules, we’ll see even more of these audits in the future.

This is just another way that current tax laws make life uncertain for business owners.

[Image source: Velkr0]