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The IRS (Internal Revenue Service) provides a large number of the section on subcontractors. The agency rules can be used as a guide to separate employee status between employees and subcontractors.

The Internal Revenue Service considers employees to be of five types:

  • Employees
  • Subcontractors
  • Statutory Employees
  • Governmental Employees

The subcontractor designation is one of the most highly litigated after a premium audit has designated the subcontractors as employees and not independent contractors.

The governmental employee designation was added in 2015 as a distinct group of workers due to some of the different tax considerations.

The Service has provided many guides over the years on how to determine a worker’s status.  Two main considerations are the degree of control and the subcontractor contract.

Some states such as South Carolina have designated the subcontractors as statutory employees after many litigated cases.

The Service has pursued offshore captives very heavily as of later.  The micro-captive review program has issued many letters to the owners of Section 831(b) captive owners advising them they will be audited soon.  As an alternative, they can voluntarily close their captives out.

For many years the Internal Revenue Service issued the Dirty Dozen list.  Micro-captives were on the list for many years until a large portion of them were audited or entered into a voluntary closure program.

New teams of auditors have been authorized in the 2021 Federal Budget to audit all offshore captives regardless of size.  The Internal Revenue Services’s goal is for 100% tax compliance with all captives.

I am not sure of the effect this will have with onshore captives.



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