How the IRS crackdown on freelancer reporting affects you

Many companies hire freelancers to complete specific projects. Contractors can be valuable as they fill a need for a short period and an agreed-upon sum so that the enterprise doesn't have to offer full salaries and include the workers in the employee benefits program.

Because the HR department is usually in charge of workforce management and is partially responsible for tax reporting, it sometimes classifies employees.

HR departments need to become increasingly vigilant in this regard as the IRS as increases its oversight into misclassification, according to Entrepreneur Magazine. In a report, the Treasury Inspector General for Tax Administration noted that businesses "avoid paying a significant amount of employment taxes," saving themselves money in the process by violating the tax code. 

TIGTA notes that a company can save $3,710 per employee per year by using the incorrect status, based on an average salary of $43,007. The research indicates that millions of people are misclassified as contractors each year. Obviously, as a result, the federal government is losing millions of dollars in taxes every year so the IRS and other agencies have had to start the oversight initiative to eliminate the problem. 

For tax reporting and classification, companies need to obtain, complete and distribute specific forms. The IRS explains that the first step is to issue Form W-9 to independent contractors. This is used to obtain the taxpayer information of a worker and should be retained for at least four years. The agency also notes that employers have to complete Form 1099-MISC to report all payments to freelancers. Additionally, a copy must be given to the contractor "by January 31 of the year following payment."

How this affects your company
The increased oversight into worker misclassification means that HR departments need to ensure that they properly identify each employee as either a full-time contributor or independent contractor.

The easiest way to do this is by clarifying the status during hiring procedures. The classification should be included in the employment contract so there is accurate documentation for reporting and tax purposes in the future.

Further, Entrepreneur Magazine notes that how much work and how long someone is with your organization can affect their classification. The news source explains that companies that are intentionally using freelancers to avoid hiring full-time contributors are creating additional risks for themselves.

What's more, there is some confusion as to how many hours constitutes full-time status. For instance, the news source reports notes that the Employee Retirement Income Security Act stipulates that 1,500 hours worked per year earns someone a retirement plan. Alternatively, the Affordable Care Act mandates that anyone who works 30 hours per week is considered full time.