Magazine article The CPA Journal

IRS Employment Tax Adjustments Caused by NJ Department of Labor Examinations

Magazine article The CPA Journal

IRS Employment Tax Adjustments Caused by NJ Department of Labor Examinations

Article excerpt

Under New Jersey Unemployment Compensation Law, three narrow tests are applied in determining whether services rendered by an individual were performed as an independent contractor or as an employee. The second test is a difficult test for many taxpayers to overcome, requiring that the service performed by the independent contractor be either outside the usual course of the business or outside of all places of business.

As the wage base for New Jersey unemployment purposes has been relatively low ($16,100 for 1993, $17,200 for 1994), if upon examination by the New Jersey Department of Labor (NJDOL) payments made to independent contractor(s) are reclassified as paid to employee(s), the back taxes owed will usually not amount to a large sum unless payments were made to a significant number of individuals. In fact, accountants' fees in representing a client before a NJDOL examination may exceed the taxes involved prompting clients to handle such examinations on their own. These factors would lead practitioners to suggest to clients that they settle their NJDOL exams without exhausting all available appeals due to the relatively small amount of taxes involved.

Beware of Settlement

There is a danger in recommending settlement of these cases. The NJDOL sends information concerning all independent contractor v. employee examinations to the IRS Employment Tax Adjustment Program (ETAP) unit based out of Detroit, Michigan, in some cases before the examination is even final. The ETAP unit in turn routinely takes the NJDOL examination information and generates proposed employment tax adjustments by merely reclassifying as employees the same individuals reclassified by NJDOL as employees. …

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