Here's the scenario: the IRS just completed an audit of your small business, and you have been informed that you owe $28,953 in back taxes and over $10,000 in penalties. You have 10 days to pay.

Sounds like another one of those, "I forgot to pay," deals, right? Wrong! This is a case of big brother, in the form of the IRS, making an independent and biased judgment on the status of a person you hired to do a job, an independent job. You hired the person as an independent contractor, but the IRS has now made a determination that they are really employees, and you should have been withholding taxes and paying the government all these years. Scary? Yes! Here's how it works, what is going on in Congress, and what you should be doing about it RIGHT NOW !

FUZZY IRS RULES
The IRS has dictated a very fuzzy set of rules you must abide by if you wish to claim a worker as an independent contractor. The rules are couched in such a manner that it is just about impossible to meet the test without a challenge from the IRS. Therefore, that person you hired to clean pools or carpets or to sell goods and services could be classified as an employee, not an independent contractor. The really difficult part to swallow is that the IRS just about has the final say-so, and unless you have a lot of money to spend on legal assistance, you will have to pay.

CLAIMING INDEPENDENT STATUS
Just because the person you hire has a business license, a state tax certificate, pays worker's compensation, is insured and has a host of other papers does not necessarily qualify that person for independent contractor status. It's the job he or she does for you that counts, and that classification is open to interpretation by the IRS.

WHAT THE IRS CAN MAKE YOU DO
The IRS can determine the individual you hired as an independent contractor is an employee. This means you should have been paying your shar e of medicare, social security, unemployment taxes, health insurance and other benefits on each of these 'employees.' In addition, you should have been withholding and depositing the federal income taxes on that individual, and since the IRS has determined that you are the taxpayer, you are responsible for the entire amount. So pay up!

At the same time, the IRS will send notice to the individual that they have determined the person is an employee, and as such must prove they paid taxes based on that fact, not on the independent contractor status. What this means is the money the individual received cannot go into the operation of the business, but must be declared a salary. If the individual wants to claim expenses against that salary, then they must file an amended return for each and every one of the years the IRS determines appropriate. Do you have all those records? Can you prove how you spent every penny? If not, you, as an adjudged 'employee' may have to also pay back taxes and penalties.

ONE WAY OUT
There is an out, and it's one the IRS doesn't like to do. You may petition the IRS to make a determination on whether the 'job' you are trying to fill is an independent contractor position or an employee position. The IRS has a form for this request, but you will have to call and request they send you one. It's not easily available, and I believe they change the name and number of it every year.

When the IRS finally makes the determination, they have to stick with it, and you are safe . . . at least until they change the rules again. When you receive your authorization, protect it like it is money. It is!

POTENTIAL LEGISLATION
Legislation gets introduced into Congress on a regular basis designed to clarify the definition of an independent contractor, and the thrust always seems to point to a more clear definition of exactly who can claim independent contractor status. Please note. These types of bills come up every year, and every year your Senator and Representative promise to do something about helping you. Why don't you hold their feet to the fire and ask how they stand on the issue? You may be surprised.

What you want is for the proposed legislation to suggest a very few simple basic test to determine who is and who is not an employee. For example, if the person is being paid on a per-unit basis and uses all his or her own equipment to get the job done, they would be an independent contractor, not an employee.

WHAT YOU CAN DO - RIGHT NOW!
Call the state or local office of your Senator and Representative and ask what they are doing to solve this vexing problem, then IN WRITING, let your Senator and Representative know how you feel.

It's your money! May you have a profitable year.