New White Paper! Maryland Employers Beware, Independent Contractor Status Challenged

August 18th, 2009 | Posted by Henry Chiwaya

The State of Maryland is looking for tax revenues and thinks that misclassified independent contractors are ripe with opportunity.  Maryland’s Governor Martin O’Malley (by executive order No. 2009.19) recently created a multi-agency Task Force that will coordinate investigations into, and enforcement of, work place fraudulent practice. The executive order defines work place fraud as a practice whereby employers improperly classify “employees” as “independent contractors”. The purpose of the task force is to assist in recouping tax revenue, such as unemployment insurance taxes, wage withholding, etc., lost because of this misclassification of employees as independent contractors.

The Task Force is an expansion of earlier legislative efforts to address this same issue specifically in the construction and landscaping industries (see Maryland’s Workplace Fraud Act of 2009). While the Workplace Fraud Act of 2009 was limited to a specific industry, the Governor’s Task Force will have jurisdiction over all employers in all sectors. The Task Force has also been directed to propose legislative changes that will enhance the investigation, enforcement and prevention of misclassification of employees as independent contractors. Bean, Kinney & Korman, P.C. provide some updated Jan 2010 insight on regulatory and legislative actions at the federal and state level.

Similar IRS Efforts
The Internal Revenue Service (IRS) has in recent years aggressively targeted employment tax collections and has increased the number of investigators looking into employment tax fraud cases. In some cases criminal fraud convictions have resulted jail terms for responsible parties.

In addition to these already aggressive efforts, the IRS also recently announced that it will embark on detailed federal employment tax audits program this fall. That program is expected to last for 3 years and will focus on 4 key areas:

1. worker classification (employee v. independent contractor);
2. fringe benefits (taxable v. tax-free);
3. officer’s compensation; and,
4. expense reimbursement.

Recommended Action
In light of the increased potential for a Maryland as well as federal employment audit, employers should take the following steps:

• Determine whether relationships with “independent contractors” comply with state and federal laws.
• Review independent contractor agreements for such compliance. Employers that do not have independent contractor agreements should be encouraged develop and execute such written agreements;
• Review benefit plans to ensure that they not include persons that have, elsewhere in the organization, been classified as independent contractors;
• Determine whether benefits and other “perks” that are provide to employees, are similarly extended to “independent contractors”

For more information, contact Aronson tax experts at 301-231-6200: Jack Koniszewski, Officer; Henry F. Chiwaya, Senior Tax Manager; or Barbara Craig, Senior Manager.

See our white paper on this topic: The “Employee vs. Independent Contractor” Challenge. This paper identifies the federal government’s new considerations and a recently enacted law and executive order currently effective in the State of Maryland. The Internal Revenue Service is slated to review this issue, along with other issues surrounding fringe benefits, compensation packages and reimbursed expenses, beginning in late 2009. The new Maryland law specifically targets businesses in the construction services and landscape services industries. With this knowledge, now is the time to prepare in the event your business is selected for an exam. Aronson tax experts would be pleased to help you evaluate your situation.

Tags: audit, Collections, Contractors, employment, Executive Order, fraud, independent, IRS, MD, Task Force, Tax, white paper, Workplace Fraud Act

This entry was posted on Tuesday, August 18th, 2009 at 8:25 am and is filed under Region - MD, Tax. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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