WASHINGTON (Reuters) — United States businesses are avoiding millions of dollars per year in federal tax payments by improperly listing employees as independent contractors, despite an Internal Revenue Service (IRS) program designed to resolve the uncertainty, the agency's watchdog said in a report on Monday.
Businesses do not pay employment taxes for independent contractors, such as consultants and freelancers, who are hired for temporary jobs.
Workers wrongly labeled as independent contractors add to the $385 billion "tax gap" of taxes owed to the U.S. Treasury but not paid, said the Treasury Inspector General for Tax Administration (TIGTA) in its report.
The IRS has a program to resolve independent contractor questions. A business or employee can request an IRS ruling for the work status of an independent contractor or worker.
Businesses often are not complying with IRS rulings that require them to classify a worker as an employee and not an independent contractor, the watchdog said.
"This problem adversely affects employees because the employer's share of taxes is not paid and the employee's share is not withheld," said Russell George, head of TIGTA, in a statement.
"If left unchecked, the problem will continue to deprive the federal government, and the American people, of millions of dollars in lost revenue every year," he said.
TGITA made four recommendations for the IRS to improve businesses' compliance in identifying workers. The IRS said it agreed to implement all four recommendations.