Businesses rely on a wide variety of strategies to meet their needs. In order to fulfill a demand for labor, independent contractors might be hired. Depending on the situation, it may be most intelligent to bring contractors aboard, perhaps if additional staffing isn’t likely to be needed in the longer term.
Independent contractors are different than full-time employees in a number of ways, but one major difference is how payroll taxes are handled. Employers are responsible for withholding and paying payroll taxes for their “regular” employees, but not independent contractors. This, of course, can catch the attention of the Internal Revenue Service.
One of the biggest issues facing businesses that hire independent contractors is facing claims from the IRS that the contractors are being misclassified. It’s not uncommon for tax officials to accuse businesses of pursuing contractors simply to skirt tax obligations.
A report from Forbes suggests that increases to the federal minimum wage could provide a reason for payroll tax disputes to proliferate. There’s a perception that many employers will rely on whatever tactics necessary to work around the full implications of rising wages, and misclassifying workers as independent contractors is supposedly one of them.
Of course, this isn’t intended to serve as a commentary about raising the minimum wage. Rather, it’s point out the fact that well-intentioned employers could get caught up in a time-consuming tax dispute with the IRS. There are sound reasons for turning independent contractors, so this labor strategy isn’t inherently about avoiding taxes. As such, businesses may want to take steps to prepare for the possibility of changes to the law and any unintended — and concerning — tax implications.
Source: Forbes, “Higher Minimum Wage Means More Independent Contractors–And Disputes,” Robert W. Wood, Jan. 29, 2014