There will likely come a time when your business will grow beyond your ability and skill to keep up with it.  What is an entrepreneur to do?  The obvious solution is to hire some help, but it’s not as simple as that.

Many small businesses use independent contractors on a temporary or recurring basis.  Business owners see these “1099ers” as a way to get work done while minimizing paperwork and avoiding withholding taxes.  

However, the Department of Labor is now teaming up with the IRS and several state governments to crack down on companies that routinely misclassify workers as independent contractors.  Illinois is not yet part of this initiative but agreements are currently pending that would add us to the list.

Generally, the difference between an employee and an independent contractor lies in the realm of what you, as the business owner, control.  If you can control what the worker does and how it will be done, and not simply the result to be accomplished, then it is likely the worker is an employee.  If the worker has control over where and how they do the work, and merely presents you with the completed task, then they are an independent contractor.  You can use the 20-factor analysis that IRS Auditors use to determine how workers should be classified.

If there is any doubt that your worker classifications are correct, now would be an excellent time to review them.  There are programs in place that will you allow businesses to voluntarily reclassify their workers while minimizing fees and penalties, and making this good faith effort is less likely to result in punitive fines.

You can participate in the voluntary reclassification program if you meet these requirements:

• You must have consistently treated your workers as nonemployees
• You must have filed all required Forms 1099 for these workers for the past three years and
• You currently are not under audit by the IRS, the Department of Labor or a state agency concerning the classification of these workers

Of course, you should consult your tax professional for specific advice regarding your particular situation, but should you wish to take advantage of this program, the first step is to file IRS Form 8952, Application for Voluntary Classification Settlement Program at least 60 days before you plan to begin treating these workers as employees.  Those who would like to do so as of the 1st of January 2012 would need to file this form by November 2nd 2011, which doesn’t leave you much time.  Still, to lower the risk of being audited on your payroll taxes, this might be a good investment of your time.