I agree with the previous two responses: if you were treating your workers as employees before, and they are essentially doing the work now, they are still your employees, and the IRS will wonder why the sudden change to independent contractor status. In other words: this will be an audit flag.
On a related note, it's not at all clear to me why you cancelled your payroll service when you knew you were going to close your business in a short time, anyway. Unless your payroll service was doing a terrible job, you might want to consider engaging them through the end of the year when you actually close down. They should already have your information (and your employees' information) input into their software, and might even be able to offer you a discount. Besides, you will need to have someone prepare their W-2's for income earned for the first half of the year.
Too many small businesses end up in trouble when their payroll person (usually a small independent contractor) quits, or when they attempt to do their own payroll. Paying what little extra you may have to pay between now and the end of the year is worth not taking the risk of facing big headaches on down the road.
LEGAL DISCLAIMER Ms. Willi is licensed to practice law in the state of OH and maintains an office in Franklin County. Ms. Willi is admitted to practice before the U.S. Tax Court, and she is authorized to handle IRS matters throughout the United States . Her phone number is 614-890-0500 and her website is www.willilaw.com. Ms. Willi is ethically required to state that the response herein is not legal advice and does not create an attorney/ client relationship. This response is a form of legal education and is intended only to provide general information about the matter within the question. Oftentimes the question does not include significant and important facts and timelines that if known could significantly change the reply or make such reply unsuitable. Ms. Willi strongly advises the questioner to confer with an attorney in their state in order to ensure proper advice is received. By using this site you understand and agree that there is no attorney client relationship or confidentiality between you and the attorney responding. This site should not be used as a substitute for competent legal advice from a licensed attorney that practices in the subject area in your jurisdiction, who is familiar with your specific facts and all of the circumstances and with whom you have an attorney client relationship. The law changes frequently and varies from jurisdiction to jurisdiction. The information and materials provided are general in nature, and may not apply to a specific factual or legal circumstance described in the question or omitted from the question. Circular 230 Disclaimer - Any information in this comment may not be used to eliminate or reduce penalties by the IRS or any other governmental agency.
The IRS has a specific definition as to when a designation of "independent contractor" is appropriate (your state probably has a definition too for unemployment and other employee taxes). From the facts here, your workers don't appear to fit that definition, even if they are family.
I suggest you do all you can to conform to the IRS (state) rules - in the end it may save you a ton of trials and tribulations.
I hope this helps.
Steven A. Leahy
Please note that the above is not intended as legal advice, it is for educational purposes only. No attorney-client relationship is created or is intended to be created hereby. You should contact a local attorney to discuss and to obtain legal advice.
Do not do it, you will be better off closing the business now and selling its assets than be in hock to the IRS . Do not compound you problems. I would most strongly recommend seeing an attorney about shutting the business with the least amount of long term harm. What you are planning is counterproductive.
To the PROSPECTIVE client, please call myself or another attorney for you choice with more detaiils and an appointment. My PRELIMINARY answer to your question(s) is for general purposes and based upon what little information you have conveyed. It is based on such limited information that the general answer should never be relied as a reason for your action or inaction. My response does NOT establish an attorney-client relationship and such may only be established by mutual agreement, and the signing of a written retainer agreement, which will generally require payment for our services, as this is what we do for a living and, just like you, we must get paid for our work.. .
I am a California attorney and cannot give legal advice in your state. My comments are information only, based on federal law and general legal principles. YOUR STATE MAY HAVE ITS OWN LAWS THAT OFFER SIMILAR OR GREATER PROTECTION. If I mention your state’s laws, it only means I did a quick Internet search and found something that looked relevant. You MUST check with an attorney licensed in your state to learn your rights.
Please see my Avvo guide detailing which workers are employees and which workers are independent contractors: http://www.avvo.com/legal-guides/ugc/independent-contractor-or-employee--federal-and-california-law.
*** All legal actions have time limits, called statutes of limitation. If you miss the deadline for filing your claim, you will lose the opportunity to pursue your case. Please consult with an experienced employment attorney as soon as possible to better preserve your rights. *** Marilynn Mika Spencer provides information on Avvo as a service to the public, primarily when general information may be of assistance. Avvo is not an appropriate forum for an in-depth response or a detailed analysis. These comments are for information only and should not be considered legal advice. Legal advice must pertain to specific, detailed facts. No attorney-client relationship is created based on this information exchange. *** Marilynn Mika Spencer is licensed to practice law before all state and federal courts in California, and can appear before administrative agencies throughout the country. She is eligible to represent clients in other states on a pro hac vice basis. ***