In recent years, the IRS has started to realize the large sums of potential tax revenue they are losing due to misclassified 1099 independent contractors who should legally be W-2 employees. When a company pays a contractor on a 1099-misc. form, they avoid the following: state and Federal tax withholdings, deposits and reports; the employer's share of Social Security and Medicare taxes, State and Federal unemployment insurance premiums, state disability insurance premiums, worker's compensation costs, fringe benefits, vicarious liability for employee negligence, and EEOC regulations.
The IRS estimates that it loses between $4 to $20 billion per year in unpaid taxes as a result of this misclassification problem. Understandably, the IRS has made it a priority to investigate 1099-misc. forms that are turned in at the end of the tax year. The IRS is continually conducting audits to determine whether or not contractors are being properly classified.
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