IRS Payroll Audits Put Contract-Employee Users on Edge

Small businesses struggling to stay lean and avoid hitting the 50-employee threshold that would require them to pay for employees' health insurance are turning to contract workers.

But tax law doesn't make it easy to distinguish between full-time staff and independent contractors doing full-time work, and the legal distinction can be confusing. And the Internal Revenue Service is auditing businesses as part of a crackdown on employers who misclassify workers as independent contractors to avoid paying payroll taxes and other employment-related expenses.

Since September 2011, the government has collected $9.5 million in back wages for more than 11,400 workers who were misclassified as independent contractors by their employers, the Labor Department says.

(more on the IRS crackdown on contract employment . . . )