In recent years, the IRS has begun to realize the large sums of potential tax revenue they are losing due to misclassified 1099 independent contractors who should legally be W-2 employees. When a company pays a contractor on a 1099-misc form, they avoid the following: federal and state tax withholdings, deposits and reports, the employer’s share of Social Security and Medicare taxes, state and federal unemployment insurance premiums, state disability insurance premiums, Workers’ Compensation costs, fringe benefits, vicarious liability for employee negligence, and EEOC regulations. Similarly, when contractors are paid on a 1099, the contractor can deduct many business expenses, and as a result, pay much less in taxes each year. The IRS estimates that it loses between $4 to $20 billion per year in unpaid taxes as a result of this misclassification problem. Understandably, the IRS has made it a priority to investigate 1099-misc forms that are turned in at the end of the tax year. The IRS is conducting audits to determine whether or not contractors are being properly classified. Many large companies, that all of us are familiar with have recently been audited, some of these companies include: IBM, Sybase, Microsoft, and Time Warner, just to name a few. After being audited, these companies have been assessed huge fines for being in violation of laws that determine whether an individual should be paid on a 1099 or a W-2.

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