Small Business Alert! The government is back for more.
The motives are a bit sketchy, but suffice to say the government needs revenue.
The state Department of Workforce Development no doubt believes it is simply making businesses comply with the law in its little crackdown on subcontracting, but the cynic in me believes it simply views small businesses as an essential revenue stream.
Angela Heim, president of The Employer Group, confirmed that after a dozen years of zero state audits of her clients, the Department recently has become very interested in whether sub-contractors actually should be considered employees — in some cases, requiring small businesses to cough up a modest amount green for back taxes. Three of her clients have undergone such audits in recent months, and it appears the lack of a federal identification number, one sign of an independently owned business, is a red flag.
Investigating these cases costs the taxpayers some scratch, and one wonders if the required time, personnel, and facilities exceeds the nickels and dimes employers are forced to cough up. Employers had better make sure their relationships with independent contractors are up to snuff, or they will be forking over back taxes.
“That is really the sticking point, these federal ID numbers,” Heim said.
In other words, here comes the judge, and he/she will be ruling on whether contacted individuals should be considered an independent contractor or an employee.
One presumed justification for the government’s revenue reach is the dwindling unemployment compensation fund, which is stretched to the limit by the lack of job creation. A better solution would be the enactment of pro-growth economic policies rather than business harassment but, hey, government knows best.
Tammy Adler, once the chief executive of QWANtify (since sold to Safe Bridge Solutions), was audited and received an unfavorable judgment, but she’s not accepting the verdict. Adler went through the trouble of developing contracts for three people in question, and each of them signed an agreement stating they were subcontractors and responsible for paying all federal and state taxes generated by their status, all insurance premiums, and all unemployment compensation.
They also agreed that they were not, in fact, an employee of QWANtify. During their tenure with QWANtify, they were not involved in employee meetings or employee outings, or subject to annual performance reviews, yet when the company was audited for 2009 and 2010, the state ruled that QWANtify should have claimed wages for the three individuals. The state proceeded to charge the company for not contributing to the unemployment compensation fund.
In Wisconsin, employers pay unemployment taxes on the first $12,000 of an employee’s wages, and their actual rate might range from 1% up to 8% or 9%. The taxes go into the unemployment compensation fund.
In the case of QWANtify, you could argue that $441.60 in back taxes and the possibility of a small fine isn’t a really big deal, but Adler sees if differently. Adler’s decision to appeal has to do with taking the proper steps to comply with state law, only to have the government claim she has violated seven of the applicable guidelines. They don’t say which ones, but Adler has taken a good look at all of them.
“When we sent our appeal back, we addressed each one of those and we are not in violation of any of them,” she asserted. “I think some employers just come back with their findings and say, ‘Oh my goodness, this is a state authority,’ and they just pay it.”
A particular target appears to be the technology industry, where individuals often subcontract for services like computer programming and web design. While the tech industry is faring pretty well in this economic period, Adler believes they rely on contractors as a way of being cautious. “They are not willing to bring in full-time headcount, so they are hoarding their cash,” she surmised. “Business still demands they still have x-amount of people helping them out, so they bring in consultants until they can really see indications that economy has come back.”
It probably shouldn’t be an employer’s responsibility to verify whether a contractor has a federal ID number. Adler says an LLC business can be run with a Social Security number; sole proprietors don’t necessarily have to have a federal ID unless they are a C-Corp or an S-Corp.
Nonetheless, employers might want to put the federal ID on their checklist of questions for would-be contractors, especially when the state views this as low-hanging fruit.
But there is another consideration that really offends business people. One wonders how much is being spent just to get a couple of grand from different business people.
“I’m in 100% agreement that they have to periodically pick individuals randomly to do the audits and make sure people are in compliance,” Adler said, “but they are going to spend more pursuing this, probably 10 times more, than what they would collect.”
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