Increased Tax Law Enforcement Could Require Policy Changes in Industry
By Scott Carroll, Take1 Entertainment Insurance
Rental and staging companies, as well as the tour sound and satellite uplink companies, face an imminent insurance risk in 2012 that could potentially cost companies hundreds of thousands of dollars in penalties. As the federal and states governments’ budgets continue to shrink, they are becoming increasingly eager to find additional sources of tax revenue and maximize the effectiveness of current tax regulations. As we know, rental and staging, tour sound, and satellite uplink owner/operators have always relied heavily on 1099 independent contract workers.
By all reasonable IRS and Department of Labor definitions the vast majority of today’s 1099 workers do not meet the requirements that determine who qualifies as an independent contractor. Now, a growing number of states, along with the IRS and the Department of Labor, are taking a hard look at companies who utilize the 1099 tax form for their employees, specifically for purposes of how 1099 workers are utilized and instructed versus how they are classified on tax forms. In California, for example, beginning January 1, 2012, if the California Department of Labor determines that a 1099 was misclassified, the employer can be slapped with a fine ranging anywhere from $5,000 to $15,000, and all the way up to $25,000 if it is determined that the misclassification was intentional and used specifically to avoid liability for workers compensation payments.
The time has now arrived when companies that may be affected are going to have to do what companies in the production industry have already done—begin classifying workers as “temporary employees” rather than 1099 independent contract workers. To be certain, this change is going to increase the cost of doing business for the affected companies, as the more comprehensive regulations being deployed will create new tax obligations for the companies. However, companies who think they can beat the new laws and do not react quickly to this new change in regulations will face the possibility of paying major fines in addition to being held responsible for the unpaid taxes.
So how does a company owner find out if they should file a worker as a 1099 Independent Contractor or as a Temporary Employee? First off, employers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing form SS-8, Determination of Workers Status for Purposed of Federal Employment Taxes and Income Tax Withholding, with the IRS.
Basically, it comes down to a couple criteria they use to determine the accurate tax status of an employee, and it is addressed on a case-by-case basis. To start, if the business owner has the right to directly control how the work is done through instructions, training or other means, the workers are most likely Temporary Employees. If however, the owner can direct or control only the final result of the work, and not the means or methods of accomplishing the result, the workers are probably Independent Contractors. Additional factors include whether the business has a right to direct or control the financial and business aspects of the worker’s job, and how the workers and the business owner perceive their relationship.
U.S. Risk’s entertainment arm, Take1 Insurance, which has specialized in insuring the live and non-live entertainment industries for more than 25 years, is studying this issue on behalf of its thousands of insured who utilize 1099 workers in an effort to provide them with guidance and help them adapt to the changing regulations. The company has connected with the premier payroll services provider, CAPS Payroll Services, to begin working on a turnkey solution to help rental and staging company owners protect against long-term liability while minimizing the inevitable increase to their cost of doing business.
With this increase in tax law enforcement across the country, the implications for rental and staging business owners are astounding. Owners who may not even know they are at risk of exposure to fines and additional tax burdens could find themselves owing up to hundred of thousands of dollars to the state or the IRS, and that is surely enough to disrupt or bankrupt a company. Because of this, Take1 is working with CAPS Payroll Services to develop a turnkey solution that will help our clients ensure they meet the proper tax guidelines and avoid hefty government penalties.
Normally, an employer would be responsible for their employees insurance claims if they are injured on the job and receive workers’ compensation. This could cost the owner a large sum through higher insurance premiums or put the policy at risk. Payroll services greatly lighten the company owner’s liability load by taking over IRS and compliance responsibility as the workers’ Employer of Record, and by handling the workers’ compensation responsibilities. This effectively isolates the temporary and independent workers from the staff labor. So, if there is an injury among the temporary or independent workers, the insurance claim is spread over $1 billion worth of payroll, whereas the production company could be affected negatively if the workers’ compensation claim was handled under their own insurance, resulting in higher premiums or a policy cancellation.
Now, payroll services aren’t free, and they will likely cause labor costs to rise. But the decision to utilize a payroll service is the smart decision in light of the enormous exposure a company could face if they were audited by the IRS. Owners can do one of two things: Operate according to the new, changing regulations and comply with the tax classification requirements in order to steer clear of any problems, or they can skirt the issue and wait for the taxman to inevitably come calling. By converting independent contractors to temporary employees, companies can eliminate long-term liability while lowering short-term liability costs.
The film and television production industries rely heavily on temporary labor and therefore utilize payroll services extensively. That way they protect themselves from unforeseen costs and tax burdens and avoid blemishing their own insurance policies at the same time. For tour sound, satellite uplink and rental and staging companies who want to be successful and experience growth in 2012 and beyond, these tax exposures need to be addressed, and using a payroll service provider is the easiest, most surefire way to guarantee everything is being done by the books and the company is free of risk.
Scott Carroll is Executive Vice President & Program Director, Take1 Entertainment Insurance (www.take1insurance.com). He can be reached at firstname.lastname@example.org (714) 285-4090.