Identifying the tax implications for businesses that engage independent contractors is one of several issues under the microscope for tax authorities at both federal and state levels.
We are aware of several state revenue offices currently conducting investigations of some specific issues as part of their broader reviews regarding payroll tax. Some of those issues spill over into the federal sphere, so it is important for taxpayers to be prepared and to understand the broader ramifications of their positions.
In determining what payments by a business are subject to payroll tax, the relevant state legislation applies to “wages” paid to “employees”. However the meaning of these terms are expanded to include payments made to certain independent contractors (“ICs”). This means it is necessary to consider:
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