Today’s post is brought to you by the brainiacs over at the Procedurally Taxing Blog. Specifically, it was this post on a taxpayer winning damages from an employer who both misclassified him as an independent contractor (he got a 1099-MISC instead of a W2) and who reported more on the 1099-MISC than the employee (he was not a contractor) actually got paid. For taxpayers in New Mexico, the federal income tax issues that result from this type of misclassification are often only one part of their problem.
One of the most common issues that brings a DIY taxpayer to my office for representation services is getting an audit notice from the state—for NM State Gross Receipts Tax. Unlike most other states, New Mexico charges gross receipts tax on the sale of goods and services. That’s why NM-GRT is included on my local clients’ invoices. When you are self-employed in New Mexico, you are “in business” in New Mexico with all that implies. Sometimes clients know they are self-employed, but for one reason or another (for example they have come from a state that does not charge gross receipts tax on services) they are unaware of the NM-GRT compliance issue. That’s why it’s usually the first question I ask self-employed potential clients and one of the things I remind current clients who are considering starting “side hustles.”
Unfortunately what also often occurs is that a client’s employer puts that client “into business” in New Mexico by misclassifying an employee worker as an independent contractor (IC). Sometimes the employer is upfront about this—sort of. Typically the employer tells the worker all the “benefits” of being an IC (deducting certain expenses, etc.) but fails to mention the drawbacks—maintaining income and expense records and mileage logs, self employment taxes (paying into Social Security and Medicare), and here in New Mexico, NM-GRT. The taxpayer thinks they are getting a good deal until they do their own tax return and get audited or get told by their #taxpro that not only do they owe income and self-employment taxes to the IRS, they owe income and gross receipts taxes to the state.
It’s important to remember that “not caught” is not the same as “accurately filed” (or in the case of NM-GRT not filed!). The computer matching used by the state (and the IRS) is only getting more sophisticated. If you aren’t sure about your requirements, it’s best to consult a #taxpro before you get the notice and it’s definitely best to consult one if you get a notice. True #taxpros offer much more than return preparation and audit representation; they manage the process for you and provide peace of mind.