Small business owners need to address a variety of small business tax issues, and it is important to comply with all requirements put in place by the IRS and California's Employment Development Department (EDD). Worker misclassification is one issue that has received increasing scrutiny in recent years, and businesses that improperly classify workers as independent contractors instead of employees may face a variety of tax penalties. Recently, the IRS and the federal Department of Labor (DOL) announced that they will be working together to identify tax compliance issues related to worker misclassification This may result in tax audits and penalties for businesses that have failed to follow the proper procedures.
Understanding the Joint Worker Misclassification Initiative
On December 14, 2022, the IRS and the DOL issued a Memorandum of Understanding for Employment Tax Referrals, and this document stated that the agencies will be working together to improve compliance with laws related to worker classification. The Department of Labor's Wage and Hour Division regularly investigates complaints related to the misclassification of workers. Under this initiative, the WHD may refer information related to investigations about alleged worker misclassification to the IRS's Small Business/Self-Employed Specialty Employment Tax unit. The IRS will then evaluate these referrals to determine whether to conduct audits and assess penalties against noncompliant employers.
The Memorandum of Understanding detailed certain requirements that must be met before cases can be referred to the IRS. A business must still be in operation at the time of the referral, and the IRS will typically only investigate businesses that did not have a good-faith basis for misclassifying workers. Referrals will only be made in cases where a business had an annual dollar volume of at least $500,000. That is, the business's gross earnings over a period of 12 months must be $500,000 or more.
...