Four Reasons the IRS Might Audit Contract Employees

Published by William T. Fricke at July 25, 2017

About Us

When you work as a contractor or 1099 employee, there are plenty of perks like: choosing your schedule, cherry-picking assignments, picking up extra work when money is tight, and even turning down gigs when you need more personal time. However, with those perks comes added responsibility, and one of the biggest burdens contract employees face is a more complex process for filing taxes. Because 1099 employees are more likely to be audited, we’re highlighting four top reasons the IRS might audit a contract employee.

1. The Contractor is a Construction Worker

While being a construction worker might not seem like the sort of gig that makes you a target for the IRS, the reality of contract employment is that there are numerous fees and forms to keep track of along the way. Any misstep can lead to an audit. Construction workers are a solid example of the type of 1099 employee likely to face an audit process because they’re eligible for numerous deductions with potential overlaps into the “personal” arena.

2. Non-payment of Social Security and Medicaid

When employers fail to withhold Social Security and/or Medicaid payments from workers’ wage packets, both parties can end up being audited. As a contractor, it is understood that you are responsible for paying these fees to the IRS quarterly. However, if your employment does not meet “contract employee” status in the eyes of the law, your employer could be in double trouble for failing to withhold the fees as well as improperly handling your contract.

3. Employee Misclassification

Because of new healthcare legislation, more employers than ever are opting to ask employees to “go 1099” to keep their staff below the 50 employee threshold. This means the IRS is keen to examine the links between employers and their 1099 employees, which can blow back on you as a contractor. The best way to avoid audit woes due to misclassification is to be sure you and your employer are following the guidance specific to your industry in regard to what constitutes a “permanent” position and what falls within the allowance for “contract” employment in your state.

4. Double-dipping Expenses

For example, it’s easy to double claim travel expenses, especially for contractors in construction, media, or other fields where jobsites vary from day to day and one relies on their own transportation to get between them. Choose to deduct “actual costs” or “standard mileage” never both. Other expenses contract employees should watch out for include home office deductions and various personal expenses, such as your cell phone charges. Keep clear records, and avoid crossing the streams when it comes to personal/professional costs.

By being more aware of the rules and regulations that surround contract employment, you make yourself a less favorable target for the IRS. Keeping an eye on these four areas is a great start. For more insight on avoiding an audit as a contract employee, contact the Fricke & Associates team today.

Explore Our Blog

We have set ourselves up as leaders in the industry to educate our audience on relevant topics in the accounting world.

Essential IRS Regulations You Should Know

July 3, 2024 by William T. Fricke

At Fricke & Associates, we prioritize informing our clients about…

Read more

Why Is Outsourced Accounting Useful for Small Business Owners?

July 1, 2024 by John Holmes

Small business owners are accustomed to wearing multiple hats, balancing…

HB 1015 and HB 1023: What You Need to Know

June 20, 2024 by William T. Fricke

At Fricke & Associates, we’re excited to share important updates…

We can help

If you need a bookkeeping professional for Small businesses in Atlanta, GA, Fricke & Associates, LLC. We have the expertise and experience to understand your needs, analyze your financial data, promote your growth, and ensure your financial future is set on a successful path. Additionally, we are a leader in developing and implementing the latest technology for optimizing accounting, tax, and financial planning solutions.

Join Our Email List

Enter your email address to stay up-to-date on recent tax laws and receive helpful tips!