As federal and states governments’ budgets continue to shrink, they are becoming increasingly eager to find additional sources of tax revenue — and maximizing the effectiveness of current tax regulations is one way to achieve it. This has resulted in a redoubled examination of independent contract workers, typically designated as 1099 contractors. As a result, broadcasters, rental and staging companies, tour sound and satellite uplink firms could face an imminent insurance risk that could potentially penalties that could run into six figures.
According to Take1 Insurance Executive VP Scott Carroll, “Rental and staging, tour sound, and satellite uplink owner/operators have always relied heavily on 1099 independent contract workers. But, by all reasonable IRS and Department of Labor (DOL) definitions, the vast majority of today’s 1099 workers do not meet the requirements that determine who qualifies as an independent contractor. Now, a growing number of states, along with the IRS and the DOL, are taking a hard look at companies who utilize the 1099 tax form for their employees, specifically to determine how 1099 workers are utilized and instructed versus how they are classified on tax forms.’
“In California, as of Jan.1, 2012, the employer of a misclassified 1099 worker can be fined from $5,000 to $15,000. If it is determined that the misclassification was intentional and used to avoid liability for workers compensation payments, that fine can go up to $25,000.
“As a result, many companies in the film and TV production industry have already begun classifying workers as “temporary employees” rather than 1099 independent contract workers. This change increases the cost of doing business, creating new tax obligations for the companies. Companies who don’t correctly classify their temporary employees face the possibility of paying major fines in addition to being held responsible for the unpaid taxes. Basically, it comes down to a couple criteria, and it is addressed on a case-by-case basis.”
To determine if a worker should be classified as a 1099 Independent Contractor or as a Temporary Employee, employers can ask the IRS to make a determination by filing form SS-8, Determination of Workers Status for Purposed of Federal Employment Taxes and Income Tax Withholding, with the IRS.
If the business owner has the right to directly control how the work is done through instructions, training or other means, the workers are most likely Temporary Employees. But if the owner can direct or control only the final result of the work, and not the means or methods of accomplishing the result, the workers are probably Independent Contractors.
Take1 Insurance, the entertainment arm of U.S. Risk, specializes in insuring the live and non-live entertainment industries. They are studying this issue in an effort to provide guidance in the face of changing regulations and enforcement. The company is working with CAPS Payroll Services to develop a turnkey solution to help industry firms protect against long-term liability while minimizing the increase to their cost of doing business.
Using outside payroll services will likely cause labor costs to rise, but may be the smart choice in light of the enormous exposure a company could face if they are audited by the IRS. Owners can do one of two things: Operate according to the new, changing regulations and comply with the tax classification requirements in order to steer clear of any problems, or they can skirt the issue and wait for the taxman to inevitably come calling. By converting independent contractors to temporary employees before coming under the growing enforcement microscope, companies can eliminate long-term liability while reducing short-term liability.
Carroll continues, “With this increase in tax law enforcement across the country, the implications for rental and staging business owners are astounding. Owners who may not even know they are at risk of exposure to fines and additional tax burdens could find themselves owing up to hundreds of thousands of dollars.”