Payroll tax – increased audit activity around engagement of contractors

State revenue authorities are increasing their scrutiny of how payroll taxes are applied to contractors.

Payroll tax provisions that apply to contractors differ significantly from other tax categories and the common law distinction between employees and contractors. There are both relevant contractor provisions and employment agency provisions in the payroll tax legislation that mean amounts paid to many contractors are considered "wages" and are subject to payroll tax obligations for engaging entities, even if they are not captured as salaries or wages for other tax or legal purposes.

Recent court authorities have reinforced the breadth of these provisions, confirming that intermediaries and businesses that rely on contractors to carry out their normal business activities increase the risk of having amounts paid to those contractors considered as "wages" for payroll tax purposes. These decisions have challenged previously held common understandings of how the