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Audit watch.

The employment tax audit is fast becoming one of the tools used most by the Internal Revenue Service (IRS) for raising revenue.

Individuals who perform contracted services for a business can be either independent contractors or employees. If a worker is an independent contractor, the business is not responsible for employment taxes. By contrast, an employer must withhold employment taxes from employees and match those taxes. In 9 out of 10 audits, the IRS reclassifies contractors as employees, often resulting in staggering taxes, interest, and penalties to the employer.

The IRS uses a list of 20 questions to ascertain whether an individual is an employee or an independent contractor. What complicates matters more is that the IRS can weigh each question differently from one situation to the next.

Thus, reaching an absolute determination of an individual's employment status can be difficult. Nevertheless, you should address the issue before the IRS does. Start by asking these questions:

* Does the individual work exclusively for your association?

* Do you have the right to control the time and location at which the individual performs services?

* Do you provide any benefits to, or reimburse any expenses of, the individual?

* Does your arrangement with the individual ensure that he or she cannot incur an economic loss when providing services to you?

* Do you have the right to discharge the individual even if the work performed is satisfactory?

A "yes" answer to any of these questions is at least partial evidence of an employer-employee relationship.

Increasing your odds of surviving an employment tax audit is a complicated task. For a good start, make sure that you have written contracts with all of your contractors clearly indicating your mutual understanding that they are independent contractors.

If you want a definitive answer as to whether certain individuals are employees or independent contractors, you can file a Form SS-8 with the IRS. Just be aware that, in close cases, the IRS will generally rule that the individual in question is an employee.

--Submitted by Andrew S. Lang, president and chief executive officer, Lang + Associates, P. A., consultants and certified public accountants, Bethesda, Maryland
COPYRIGHT 1993 American Society of Association Executives
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:News & Know-How; employment tax audit generates revenues for IRS
Author:Lang, Andrew S.
Publication:Association Management
Date:Oct 1, 1993
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