The Internal Revenue Service will be focusing on four employment tax compliance initiatives in 2010 as part of its Employment Tax National Research Project: worker classification; tip reporting compensation; corporate officer compensation; and fringe benefits, says Jackson Lewis.

The law firm says that the IRS will focus on whether a worker is properly classified as an independent contractor or an employee. “In 1984, the IRS estimated that U.S. employers misclassified 3.4 million employees, resulting in a revenue loss of approximately $1.6 billion to the government. The IRS is concerned about how this number may have increased since then and the tax revenue lost due to misclassification,” says the firm.

“Unfortunately, there are no bright-line tests for determining employee status. While violations discovered in an IRS classification audit can bring penalties, various tax law provisions and IRS programs that mitigate the amount of federal tax penalties that can be imposed for misclassification. Thus, any federal tax penalties often may be significantly less than the penalties imposed for violations of other employment laws. However, a determination for federal employment tax purposes is not binding for purposes of applying other Federal and State statutes and an individual may be classified as an “employee” under some statutes and an “independent contractor” under others. Employers should review their independent contractor classifications under the federal employment tax rules as well as other employment law statutes that govern these issues,” Jackson Lewis says.