President Barack Obama's plan to raise the minimum wage for federal contractors while vowing to fight for minimum wage increases overall could lead to employers treating workers as independent contractors, making it more difficult for the IRS to receive taxes, according to Forbes.
In his State of the Union address, with fast food workers sitting in the audience as his guest, Obama said he planned to sign an executive order increasing the $7.50 an hour minimum wage for people working in federal contracts to $10.10, and he urged businesses to follow suit.
But Forbes warns, "Higher payroll taxes can mean more pressure on companies to use independent contractors. So can higher benefit costs and mandated health insurance. And so can higher mandated wages. And while it certainly doesn’t give employers a pass to mislabel employees as independent contractors, there are considerable grey areas."
Contributing editor Robert W. Wood explains that from an economic standpoint it makes sense for employers to "push the envelope" and turn their workers into private contractors. There's no withholding tax on independent contractors, who have to pay their own taxes, which could result in the Internal Revenue Service having to chase these potentially new independents for their taxes.
Forbes points out that although paying higher taxes on worker's wages will not necessarily lead to employers converting staff into independents contractors, there is a connection because "employers have a duty" to withhold taxes from employees.
"That’s one reason the IRS likes employees better than independent contractors. The IRS gets its tax money sooner and more reliably by withholding," says Wood.
The Government Accountability Office said the IRS is losing billions of dollars in unpaid taxes from workers misclassified as independent contractors.
But the Department of Labor, which says 30 percent of employers mis-classify workers, announced in 2010 that it was issuing new regulations requiring companies to write a classification analysis for all its staff, including independent contractors, Forbes said.
Under current IRS rules, employers are liable for not withholding taxes, even if they thought that their workers were independent contractors and failed to withhold taxes for that reason.
Wood adds, "If it turns out you did have a payroll after all, the company is liable for all the employment taxes and for failure to withhold income taxes. And even if the company is insolvent and can’t pay, the responsible persons are on the hook personally."
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