Co-author Michael Kelsheimer

Are your landmen independent contractors? Are they employees? What do they look like to the government?

Why should you care about these questions? Because your government cares. When independent contractors do not report all of their income, or take questionable deductions to reduce their earnings, Uncle Sam is deprived of income, FICA, and FUTA taxes. Unable to raise taxes on their own, the IRS and Department of Labor are squeezing tax dollars from any place they can. The “misclassification” of independent contractors is a pot of gold.

New investigators have been hired. Fines are up 500%. The IRS has sophisticated new software programs that monitor businesses fitting the misclassification profile: Large numbers of 1099-type payments to individuals in excess of threshold amounts, and 1099’s to the same individuals year after year. To make matters worse, government agencies have started to cooperate and share data on potential violators.

But wait, there’s more!

Assuming the IRS finds you before you turn yourself in or the DOL finds you, they will assess the employer’s half of back payroll taxes, penalties and interest, possibly the “contractor’s” half of back payroll taxes, and the amount that “contractor” should have withheld. In some cases, this number approaches 40% of the amount paid to each “contractor” over the last three years. Do the math. The liability could add up quickly.

But wait, there’s more!

It might not end with the IRS. You could be handed off to the DOL, who will ask for time sheets for those “contractors” who have now been re-classified as employees. You treated them as contractors, so you won’t have time sheets, so DOL will interview them and ask about the overtime they worked, say in the last three years. With a free pass to answer and no time records to dispute them, some witnesses will say just about anything and DOL will then assess for overtime.

If you are in Texas, the Texas Workforce Commission may audit for unemployment benefits due to terminated “contractors” who should have been treated as employees.

But wait, there’s more! 

Once bitten by the IRS and DOL, your more entrepreneurial competitors might decide to turn in everybody else they believe uses the same approach. For this treachery they will receive up to 15% of the government’s recovery.

What to do?

There are at least two options: (1) take steps to reduce the appearance of landmen as employees ; or (2) If you believe you have a problem, re-characterize landmen as employees and take advantage of the very favorable settlement program now offered by the government and thereby reduce your liability by as much as 95%.

Study your treatment of landmen to determine which method is right for you. Don’t wait around; the settlement program does not have a definite end date.