Recruiting and staffing companies are instrumental in helping people get jobs, yet they have a unique set of circumstances for dealing with the IRS. Since none of the people they place into positions are technically their employees, they have to be careful when it comes to taxes. As a result, staffing companies often struggle with taxation issues around employment misclassification. In this article, we explain the steps companies can take to avoid this challenge.
At first glance, it seems normal to classify people that work through a staffing or recruiting agency as independent contractors. After all, they generally perform tasks for a third party and not the staffing agency. However, that is not always the case. Businesses must be sure employees are classified correctly in order to remain in good standing with the IRS.
Though the thought of claiming employees as independent contractors in order to reap the tax benefits is attractive, it can also get organizations into trouble. Each employee needs to be classified according to IRS guidelines. For instance, what is the difference between a W-2 worker and independent contractor? The IRS has precise definitions to explain how workers need to be classified. Knowingly or unknowingly refusing to follow the IRS guidelines can result in stiff fines, payments or even criminal punishment.
Staffing companies have a lot of responsibility in regards to accounting, including filing taxes correctly. There are many traps that can be avoided by doing a little research and/or consulting with a seasoned tax professional:
● Misclassifying employees is the number one reason most staffing and recruiting companies get into trouble with the IRS. Before hiring too many temp workers, make sure you know how to classify them correctly.
● Small businesses get targeted the most by the IRS for uncollected taxes, including staffing agencies. Whenever you get a notice from the IRS, take the issue seriously.
● Avoid withdrawing tax funds to cover other expenses. Small businesses face a lot of overhead, and it’s not always easy to make ends meet. However, the last thing you want to do is borrow funds that were pulled from employee paychecks with the assumption you’ll pay it back in time to cover tax filing with the IRS. It’s a huge mistake that should be avoided at all costs.
● Simple-to-overlook tax stipulations come back to haunt you. There are several nuances that staffing companies need to be aware of. As a result, we highly recommend that staffing and recruiting agencies consider working with a tax professional to remain in good standing.
No one likes to keep a ton of records. Thankfully, things have become a little more simplified with digital records that are easy to store and access at any time. Good record keeping helps if the IRS ever raises questions. It’s important to store thorough employee records including names, addresses, Social Security Numbers, dates of employment, total amounts paid to each employee, etc.
You’ll also want to be able to quickly access all W-4 forms, copies of tax returns filed, dates and records of each tax deposit made by your company and all W-2 forms that were never delivered to past employees.
Tax credits and deductions are provided by the federal government as a way to offer certain tax incentives. However, they are commonly abused or misused, which can raise the attention of the IRS. The Work Opportunity Tax Credit (WOTC) is a good incentive for staffing companies and recruiting agencies. The credit rewards employers that seek to hire individuals who previously faced significant barriers to employment. For example, veterans, food stamp recipients and those who have misdemeanors or felonies on their records are more likely to face significant challenges in getting hired. The WOTC rewards companies who hire them.
However, before you decide to claim WOTC (along with other tax credits and deductions) make sure your company is eligible for the tax break. If the IRS isn’t able to answer your questions, we recommend consulting a tax professional.
Levy & Associates appreciates all that recruiting and staffing companies do to help people find rewarding careers and we want to help you deal with the IRS. Do you have questions or need assistance with a notice you received from the IRS? Contact us at 800-TAX-LEVY, or visit www.www.levytaxhelp.com.
Levy & Associates is available for free initial consultations. We’re happy to answer any questions you have about the audit process or address any concerns about your specific situation.
There’s never a good time to be audited, and the time-consuming process will take away from your business or family if you try to face it alone. Let us handle and coordinate communication, so you can return to your daily life.