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Do you receive 1099-MISCs from people or businesses? Are funds paid to you located
in Box 7 - Non Employee Compensation? Did you know that if your customer is selected
for a work comp or payroll tax audit, funds paid to you are at risk of being assessed?
If your customer is selected for an audit, the auditor will want to examine at least
two things:
- The check register.
The auditor will go through the check register and look for payments to individuals.
If those individuals are not employees, this could be a problem.
- Funds located in "Outside Service" type expense accounts. On your customer's
books, funds paid to you are probably located in some type of non-wage expense account,
such as "Outside Services." The name of the account does not matter - if it's not
for employees, then it will get scrutinized more closely in these types of audits.
If the auditor reassigns your payments as "employee wages," this could be disasterous
to your customer, because additional money for work comp or payroll taxes would
be owed by your customer, not by you. Plus, there will probably be penalties
in addition to the taxes. Penalties are quite steep, and are not deductible.
Like me, I'm sure you don't want your customers to pay work comp or payroll taxes
on funds paid to you. Here are seven steps you can take to virtually eliminate this
risk:
1. Get a Fictitious Business Name. If the checks are made payable to your
fictitious business name, this makes it clear to an auditor that checks you received
were paid to a business, rather than to somebody who might actually be an employee.
2. Always Give Invoices. Every check you receive from your customer needs
to have an invoice justifying it. In an audit, the auditor may ask your customer
to see these invoices. If your customer can produce them, this goes a long way to
show that you are not an employee.
3. Invoice for Regular Amounts. If you can compute a flat fee for your services,
all the better. When your customer pays you by the hour, this is a red flag to the
auditor that you might actually be an employee.
4. Invoice on a Monthly Basis. If your cash flow allows for it, invoice your
customer every month, rather than every week or every two weeks. Again, monthly
invoices look like your customer is dealing with a real business. Weekly or bi-weekly
payments spell, "Potential Employee."
5. Provide Your Own Equipment. If you are using your own computer, software,
car, etc., all at your own expense, this is an indicator that you are a real business.
If you do not do these things, this looks like you are not in business - you may
be an employee.
6. Have More Than One Customer. If you provide services or products for more
than one customer, this looks good in the event of an audit. If this customer is
your only customer, you may be an employee and not a real business.
7. Cover Your Own Expenses. Many expense reimbursements are a possible indication
that you are not in business for yourself. Instead of seeking reimbursement, write
them off against your own income. Raise your fee to cover the additional expenses,
if you must.
Final Thoughts
The more of these you do, the better chance your customer will not have to pay additional
money for work comp or payroll taxes in the event of an audit. Keep your customers
protected and implement all of these strategies soon.
About the Author: Jennifer A. Thieme is a Certified QuickBooks ProAdvisor
who loves to help people with QuickBooks and other accounting issues. She brings
unique insight, clear instructions, and over ten years of experience to all of her
business articles. Owner of Solid Rock Accounting Services, Jennifer's clients enjoy
these same benefits on a personal and regular basis. You can too - visit http://www.jenniferthieme.com/ and contact Jennifer today.
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