State unemployment tax audits: Employee or independent contractor?

The Internal Revenue Service (IRS) cares about accurate classification of employees and independent contractors, but so does your state unemployment tax department. No one ever thinks he or she will get audited, and many practitioners are surprised to learn that state unemployment departments often audit more frequently than the IRS.

Gary I. Glassman, CPA.

To determine whether you're hiring an independent contractor or a part-time employee, ask yourself what void you need the new hire to fill. For example, if you hire a veterinarian to work one or two days a week every week for an extended period of time, the government might consider him an employee, even if he also works at other hospitals.

Still not sure how to classify your hire? The Internal Revenue Service (IRS) has a 20-point test to use as a guide, which you can find at www.irs.gov.

To protect yourself, ask the veterinarian for a copy of his or her license and certificate of insurance. If you're audited, the auditor will require these. Also request the veterinarian's business card, which should indicate that he or she is in the business of providing relief services, and obtain an invoice for the services provided, preferably based on a day rate and not an hourly rate, which is more commonly used to compensate employees.

If the veterinarian registers with a service for relief work, get a copy of the service listing, and ask the veterinarian to complete an IRS form W-9. This form provides all of the information you'll need to report his or her earnings and to issue an IRS 1099 form at the end of the year.

The bottom line: The burden of proof is on you, not on the veterinarian you hired. So make sure you cover all the bases.

Gary I. Glassman, CPA, a Veterinary Economics Editorial Advisory Board member, is a partner with Burzenski & Co. PC in East Haven, Conn., and specializes in veterinary accounting and tax planning. Please send questions or comments to ve@advanstar.com.