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Increased activity on key payroll tax issues

Increased activity on key payroll tax issues

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.

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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:

  • which of an organisation’s workers are its employees, as distinct from any ICs
  • for any ICs to confirm whether a specific exemption is available (if not then the payments are subject to payroll tax)
  • which payments to employees are not wages (for example, were any payments made to employees other than in their capacity as employees – such as payments for use of their image where the employee is a public figure).  

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