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Employment tax compliance forces IRS business audits

published in The Oklahoman | February 7, 2010

Employee benefits attorney and McAfee & Taft shareholder Dudley Hyde was interviewed for an Oklahoman article about the Internal Revenue Service employment tax compliance audits that will be conducted randomly on 6,000 businesses nationwide over the next three years. Though the investigations will seek to identify failures to pay employment taxes and taxes on fringe benefits, the focus will be on the employer’s classification of workers. According to the IRS, misclassification of workers resulting in unreported receipts and overstated expenses, which are common among self-employed workers, contribute to 82 percent of uncollected taxes.

The past 25 years have seen significant change in the way employees are classified. According to Hyde, misclassifications can be costly for an employer, including penalties and back taxes, but also benefits demands from the reclassified worker, including retirement, medical and paid time off. Hyde told the Oklahoman, “The question comes down to who exerts control over the contractor’s work. Is he really self-employed, or is he expected to attend all training sessions and is invited to the annual Christmas party?”

“Some companies laid off employees and then hired them back as independent contractors and they’re still there five years later or longer.” Hyde’s recommendation, “employers generally should hire or terminate contracted workers after one year.”