Independent Contractor Vs. Employee Rules Are Updated

The New Administration imposed new rules in the continuing debate over whether or not a worker can be classified as an independent contractor or an employee. This continuing nightmare will have significant consequences across several sectors of business including food & beverage establishments, construction, and transportation.

The rules, which go into effect in March, impose stricter tests in making the determination. The administration’s hope is to get people off of 1099’s to as great a degree as possible.

Whether or not a worker can be considered an Independent Contractor will include the following questions…

1 – Is the job considered a permanent position or is it temporary?

2 – Does the employer have any control over how the work is performed?

3 – How integral is the worker’s job to the overall performance of the company?

Earlier last year, the New Administration reaffirmed its stance that an employee was defined as, “Any individual working for any company in the US.” This is the broadest definition and position I’ve ever seen the Feds enforce.

Why is all of this important?

There’s billions of dollars in unpaid payroll taxes on the table. I haven’t seen a recent estimate but something in the neighborhood of half of all independent contractors are believed to not file income tax returns.

These individuals are the definition of the Tax Gap. As such they don’t pay the appropriate payroll or income taxes on their income and the Federal and State Governments want their money.

National companies like Uber and Doordash that employ millions of Americans as Independent Contractors are currently engaged in year’s long legal struggles at all levels of government trying to maintain the Independent Contractor status of their workers. If they lose they’ll not only have to pay the additional employer portion of payroll taxes, but they’ll also probably lose upwards of half of their workers.

The next time you hop into an Uber and have a driver whose name is unpronounceable, ask yourself whether or not that driver actually wants to pay taxes…ever. I’ll give you 99 guesses as long as the first 98 don’t count.

Let me leave you with this.

We have the pleasure of living and operating our businesses in a State named Illinois that imposed these Draconian Rules decades ago. Let me give you a little bit of a history lesson.

During The Clinton Administration, the Social Security Administration ran dry. Congress had to do an emergency funding bill so that the retirees would continue getting their monthly checks.

The Director of the Treasury then sat down with the Director of the Social Security Administration and asked why. The answer came down to all of the 1099 contractors who weren’t properly paying into the system. Those individuals who hadn’t paid anything in were now collecting benefits, bankrupting the system.

At that point we had a major shift in how the existing employment tax laws were enforced. The laws didn’t change, but how they enforced them did.

Prior to that point, we had the old 20 question acid test that would determine whether or not we could put a worker on a 1099. We even had Independent Contractor Agreements the size of the Old Testament written by the Law Firm of Dewey, Cheatum, and Howe that protected us.

But all of that changed in a heartbeat.

Now, in the event of an audit, the auditor won’t look at any of that. They look at the names on your checks. If those names are ABC Inc, DEF LLC, or whatever other company name we can imagine, then you’re in the clear. If those names are Jimmy, Jenny, or Joey and they didn’t go through your payroll, you’re guilty.

Period. End of Story. Fahgetabadit. There are no arguments to be made. Trust me. I’ve tried.

What happens next? That depends on the level of government where the audit occurs.

If it’s at the Federal Level and you have as little as $100K in 1099’s during a given year that were miscategorized, they’ll hit you with 15.3% in Social Security and Medicare Taxes. Also you’ll be required to pay the required Federal Withholding Tax that should have been withheld at let’s say 20%.

So far that’s a $35,300 tab, but they won’t stop there. They’ll open up two more years of income tax returns for audit just because they can.

If those results are similar to the first year, then your bill just became $105,900, but are they done yet? Of course not.

You also have to pay penalties and interest. Sometimes that amount depends on how much you aggravated the auditor, but let’s estimate and say that the bill just became somewhere between $170K and $190K.

Don’t play these games. There’s no way to win. If you have any questions, please give us a call.

We’re all going to get through this. Let’s get through it together.

As an inducement, we’re offering 33% off your first six months of bookkeeping and / or the first three months of electronic payroll services on a complimentary basis. In order to claim this benefit, please click on the appropriate button below and provide your contact information. We’d love to help.

Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,

Sincerely yours,

Chris Amundson


Accounting Solutions Ltd.



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Chris Amundson
Accounting Solutions Ltd.

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