A warning: newspapers that have been using independent contractors to stretch tight staffing budgets may be in for a visit from the Internal Revenue Service. Those reporters, often hired as suburban correspondents, may have to be classified as employees if their paper wants to avoid an audit.

In these recessionary times, businesses have an increasing incentive to misclassify their employees. In addition to not having to pay health and pension benefits, the company shifts its Social Security tax burden over to the contractor (a move that, in turn, doubles the worker's Social Security tax). And the appeal of such accounting practices is likely to intensify as new payroll taxes, like a possible national health care levy, are enacted.

To an IRS agent, this cost-saving measure may look like tax evasion, and officials are cracking down. Molly Leahy, manager/state affairs for the Newspaper Association of America, says newspapers have been steadily calling the association for advice on how to handle employment audits, adding that the NAA has established a committee to study the issue and recently published a manual explaining how independent contractors can and cannot be used.

Just what is an independent contractor? That, as the IRS readily admits, can be a tough question. Since Congress has given no clear definition in the tax code, the IRS uses a twenty-question test to figure out how close a contractor comes to the classic definition of an employee.

The big factor, says Tony Warcholak, director of the IRS Office of Employment Tax Administration and Compliance, is control: Does the employer set the hours and standards under which the contractor works? Does the employer provide a desk, phone, computer, or mailbox? Does the contractor take home a regular paycheck? Who determines what duties the contractor will perform? In short, is the contractor working for the newspaper or genuinely running a business?

Independent contractors who believe they have been misclassified can request a determination by filling out IRS Form SS-8. The move can be worth some money: correspondents who are found to be employees are eligible for a refund of the Social Security taxes their employer should have paid. Additionally, these correspondents may also be eligible for federal unemployment and worker's compensation benefits, although the IRS is not the agency that decides this.

But contractors should be warned: an SS-8 inquiry can be appealed by the newspaper and, in some cases, the newspaper will be eligible for a 1978 loophole commonly called safe haven protection (section 530), a product of the complicated interaction between Congress and the IRS. Most commonly, safe haven protection is granted if a company can prove that an IRS agent examined the books while misclassified workers were on the payroll but failed to spot them, Warcholak says.

Some two dozen correspondents at The Philadelphia Inquirer found out about safe haven the hard way last year when they asked for an IRS determination of their status.

The Inquirer pays as independent contractors about 175 reporters and photographers, many of whom have been hired for finite two-year terms, to cover suburban beats (see "The Rise of the Super-interns," CJR, January/February). A number of these people work a standard week under an editor's supervision. They are assigned desks in a bureau, receive regular paychecks, and rarely work for other businesses. After reviewing their SS-8 forms, the IRS agreed that, for tax purposes, they were employers.

The Inquirer, however, appealed, and the IRS later amended its decision, stating that the paper was eligible for safe haven protection. As a result, the Inquirer's correspondents have been relegated to a kind of tax netherworld: they are "Section 530" workers, neither employees nor contractors. While no one is required to pay the Inquirer's half of the Social Security, the correspondents are not allowed to claim the hefty income tax deductions for which true independent contractors are eligible. The status of these "non-staff correspondents," meanwhile, is under negotiation between the Inquirer and The Newspaper Guild.

Landmark Communications, Inc., a news chain based in Norfolk, Virginia, opted to revamp the corporation's contractor policy after studying the law and contacting a number of papers, including a few that had been audited. Today, Landmark's editors use part-time employees rather than contractors for steady beat work. Those who remain independent are not allowed to work in the newsroom, cannot use the equipment, and are paid set fees per article.

At some publications, on the other hand, upper management may not know -- or may not care to know -- that their independent contractors function as employees. At one newspaper in the northeast, independent-contractor stringers, who regularly cover towns and beats in bureaus, are told to discreetly vacate their desks when higher-ups from downtown are scheduled to make an appearance. "It's like we don't exist," says one.

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