The audits will focus on employment taxes…
…specifically backup withholding for 1099s, fringe benefits, employee-independent contractor status, and executive/officer compensation. The purpose of this article is to discuss the most common employment tax issues included in the audit, understanding the difference between a W-2 employee and a 1099 independent contractor.
Being in the payroll industry, we get asked this questions frequently: Do I have to withhold taxes if I have an agreement with my employees that they will pay their own taxes? The answer is yes.
The distinction between employee and independent contractor is not determined by an agreement between the employer and the individual. It is determined by the IRS and many business owners/officers (especially new businesses) simply do not understand this.