Millions of misclassifications

An article posted on the BNET web site states that the IRS estimates that more than half of the approximately 5 million workers being paid as independent contractors should be reclassified as employees. MBO Partners, a business service firm specializing in placement of consultants and freelancers, claims that independent contractors are currently the fastest growing segment of the American workforce.

Cutting costs can be risky

Independent contractors are invaluable to many businesses, in terms of flexibility as well as talent.  They can be engaged and disengaged without the red tape and labor burden associated with hiring full-time employees.  Simply put, it costs less to pay independent contractors.  Employers who improperly classifiy workers as independent contractors, however, risk liability for back taxes and significant fines, even when the misclassification is unintentional.

IRS requirements for classification of employees and independent contractors are strict, but because employers stand to save so much money by classifying workers as independent contractors, they routinely disregard the rules. When employers pay independent contractors and report the compensation on IRS form 1099, they do not pay the payroll taxes and unemployment insurance required when employee compensation is reported on W-2 forms.

IRS audits may have a domino effect

According to CNNMoney.com and Gene Zaino, president and CEO of MBO Partners, most states now share data with the IRS and a noncompliance finding by the IRS is likely to lead to issues with state labor departments and other state agencies as well.  Given the new IRS compliance agenda and the interconnectedness of federal and state tax agencies, businesses hoping to avoid paying into unemployment insurance funds should take steps to verify independent-contractor classifications.

Businesses and workers should verify classification status

Businesses that utilize independent contractors should review applicable state and IRS classification guidelines or consult a tax attorney.  Workers or employers who are uncertain about classification can request a status determination by completing and filing IRS Form SS-8.

Good news for some

As the IRS heightens enforcement of classification rules, the cavalier hiring and firing of independent contractors may become a thing of the past. This is good news for workers who’ve gone years without social security or unemployment entitlements, and who’ve had to pay self-employment taxes as a result of misclassification. Classification as an employee also makes it easier to qualify for auto financing, home mortgages, payday loans and other forms of consumer credit.

With the world economy firmly entrenched in a reset mode, loans of all types are becoming more difficult to obtain. That is not to say that it is impossible. The fact of the matter is, financial institutions, banks, and credit unions will always make loans. It is the lifeblood of the financial industry.

The business part

With a record number of foreclosures, the inventory of available homes is large. That makes the market very saturated with homes that are in the hands of the home buyers. Therefore, banks will need to make home loans. The process for securing home loans may indeed be more difficult, but home loans are still very much available. Potential home buyers have many choices on where to secure home loans.

Changes made, documents are now a priority

One of the first differences home buyers will notice when trying to secure a new home loan is that the need for accurate documentation is now a priority. In the past, consumers could literally loan with no down payment, no documentation to prove income, and a substandard credit score. Essentially, with a signature a home buyer could secure a new home loan.

Today’s requirements

Those days are past. Today, lenders are requiring borrowers to provide accurate documentation to support a new home loan. That means being prepared as you begin your search for new lender.

More documents are needed

Gather all your financial statements and documents. Make sure that you pull a recent credit report on yourself. If you have pristine credit, securing a new home loan will not be an issue. However, if your credit score is below 650, it’s likely you will have to provide documentation to answer why your credit score is lower. This does not preclude you from a new loan, it just means providing more documentation.

This may mean having to provide explanation letters to prospective lenders about why your credit score or credit report shows a negative. Provided that you have overcome the issues that produced a negative score, and can provide documentation to that effect, lenders may be willing to provide a home loan for you.

The competition between lenders

It’s likely that you are bombarded with lenders advertisements trying to entice you into using their company. This can work to your advantage. Here is how. Make sure that any lender you communicate with understands that you are shopping on your own among several lenders. There is nothing like the thought of competition for a prospective lender to work harder for you. This may result in a lower interest rate, or other financial benefits. The point is to shop one lender against the other for your benefit. Lenders need borrowers as much as borrowers need lenders.

Mortgage loan modification programs aim to make these signs less popular. Image from Flikr.

Consumers seeking debt relief may be one step closer, if the president has his way. President Obama is set to revamp financial products in an effort to protect borrowers from delinquency and foreclosures. The recession has brought the number of defaulting loans and people losing their houses to record highs. It caused the lending and banking crash, that pushed banks and lenders perilously close to complete financial ruin.

The goal of the government is to make the loan process as simple as possible for consumers. They cite the intricate and wordy loans of the past as the number one cause people defaulted on their loans in the first place.  Their vision is to create an easy loan process that works with the customer instead of the lending institution.  The Obama administration has taken a lesson from the new 401(k) procedure where a record number of companies are automatically signing new employees up for the retirement savings plan, unless they opt out. The same ease of inclusion that is a characteristic of 401(k)s will hopefully be enacted with home loans.

The financial overhaul

Several weeks ago, Obama unveiled his plan to overhaul the financial regulatory system by creating a Consumer Financial Protection Agency. The purpose of the agency would be to “monitor consumer financial products and revamp the entire home-loan process.”  In March the administration began embarking on its $50 billion plan to aid lenders in modifying home loans and lowering payments for customers.

The Consumer Financial Protection Agency is the next step to making housing affordable. As spokesperson Gary Ulbreicht stated, “The initial stimulus for the lending industry was for short-term help. … It’s meant for people who are currently in trouble and need assistance. The Consumer Financial Protection Agency is for long-term change. …Hopefully, it will successfully monitor financial actions of lenders for years to come.”

Critics of the plan

Critics of the plan maintain that its slow start will deter any real change for desperate consumers.  Many lending counselors are criticizing the plan, stating that lenders and banks nationwide are reluctant to cooperate.  Currently, approximately 50,000 homeowners are enrolled in a three-month trial mortgage modification program under this plan. However, initial goals of the administration were for 4 million households to be on board by this time.

Critics are also saying that the plan is paternalistic and would “restrict borrowers’ options and make loans harder to get and potentially more expensive.”  Making loans more difficult to procure would make consumer debt relief impossible.  Once that happens, people will stop spending again and less money will be fueling the economy. This situation could create an even greater recession for the entire market.

Still help is needed

Despite criticisms, the reality is that help is needed in the mortgage arena.  Although there is a fear that the Obama administration is limiting loan products and thwarting innovation, if they can make loans more affordable for the many homeowners in serious financial trouble, it might be worth it. Once homeowners can get a handle on their mortgages, they will be able to  work on complete debt relief.

Possibly the standard “30-year fixed mortgage” that so many critics are decrying is just the thing the nation needs to get back on its feet.  Kevin Iverson, mortgage broker for Reed Mortgage Corp., stated, “This country’s home owning pool was built on the 30-year fixed mortgage. …It worked to create a steady base of homeowners who could pay their bills and at the end of that time, owned their homes. Why not get rid of all the diverse and confusing loans and return to the old model?  It worked for the country once, why won’t it work again?”