Expert: Paul Sid, CPA CFA - 10/19/2011

Question
Hello, and thank you in advance for your time. I am aware of the categorical difference between independent contractors and employees, my question is based more on financial benefits. We are a very small start up company (3 years running) and are expanding our teams. We are debating about moving our Independent Contractors into the company as Employees. Can you give me some advice on the financial/tax/ANY OTHER monetarily based advantages/disadvantages of doing that?
Thanks!
Aubrey

Answer
Hi Aubrey,

Thanks for your questions.

I applaud you for taking the right step by reclassifying your independent contractors to employee status.

You asked ". . . financial/tax/ANY OTHER monetarily based advantages/disadvantages of doing that?"

Such a move includes many considerations:
1. To get the IRS off your back;
2. To identify your true liabilities;
3. Limit lawsuits from "independent contractors";
4. Increase in employee benefit cost.

1 IRS.  The IRS has a lot more people and financial resources that your business have.  You do not want to get into the position of receving a large tax bill from the Service, having to hire a tax profession to explain your position, and at the end loss your case.  Such an outcome would result in unexpected payroll tax expense, interest expense, tax penalties, and CPA fees.

2 Identify your true liabilities.  At any point in time you want to understand the "true cost" of running you business.  Employee cost is a major expense for most businesses.  If you should loss to the IRS, the payment of back payroll taxes, interest, and penalties would greatly impact current period income.

3 Lawsuits from "independent contractors."  Today, you probably have an excellent relationship with all your employees and independent contractors.  But what is a strong relationship today could turn negative.  If such is the case the independent contractor could report you to the IRS and/or sue you for discrimination on employee benefits.

4 Employee benefit cost.  By classifying independent contractors as employees, your employee benefit cost will increase.

I wish you much success in your business.

Regards,

Paul Sid, CPA CFA
financialedge.net