Reclaiming taxes of the past
The rest of my column this month is devoted to enlightening readers about an intriguing new Internal Revenue Service program
that reclaims the lost souls of veterinarians and other businesspeople who've cheated on their payroll taxes in the past.
In mid-September, the IRS announced a new incentive for small businesses—including veterinary practices—to come clean on prior
mischaracterization of employees as "independent contractors." Under the new regulations, Treasury will permit firms to reclassify
independent contractors who should've been considered employees for payroll tax purposes in prior years. If you notify the
IRS that your practice's characterization of employees was incorrect, you'll pay a small penalty instead of ponying up all
the unpaid payroll taxes (FICA, Medicare and so on), which were avoided through the original improper classification.
Two important points to think about when considering the government's offer of quasi-amnesty: First, there may not be any
analogous program in your state, so uncollected state payroll taxes may still be due and penalties may be associated with
the improper classification when it is revealed. U.S. and state tax authorities are joined at the hip when it comes to tax
Also, if the veterinarian/independent contractor has taken advantage of his or her 1099 form status in such a way that he
or she only paid income tax on the amount shown on the form, notifying the IRS of the clinic's improper classification may
bring even more things to the service's attention. For example, it may alert the IRS to that employee's failure to pay self-employment
tax (the independent contractor's version of FICA and Medicare). And again, state tax departments are likely to become aware
of any federal investigation of that veterinarian.
Finally, be advised that Treasury is using this offer of reduced penalties for businesses that have wrongly classified employees
as contractors as an amnesty of sorts before it starts vigilantly evaluating how businesses classify workers in the future.
For example, we could see a more scrupulous screening of veterinary practices filing form 1120S (income tax form filed by
subchapter "S" professional corporations) to determine if there's a large expense for "relief veterinarians" or simply for
Small business corporations have historically enjoyed a relatively small amount of audit activity by the IRS compared with
larger firms whose potential audit revenue is greater. However, remember that with each passing year, the hardware and software
the government uses to identify potential audit targets becomes more sophisticated. It won't be difficult for the Tax Man
to spot cheating through the use of "improper employee classification."
Figuring out what legally constitutes an independent contractor vs. what constitutes an employee is complex, and I've written
about it frequently. However, with the government drawing new attention to the subject and the potential cost to veterinary
practices involved, I intend to re-visit the topic in the not-too-distant future. In the meantime, talk to your tax preparer
and accountant to see where you stand.
Dr. Allen is president of the Associates in Veterinary Law P.C., which provides legal and consulting services to veterinarians. Call
(607) 754-1510 or visit email@example.com
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