This episode is part of the “Best of Bella” series. Bella chose this episode with a former state auditor as one of the best, because she loves being able to bring unique experts to you. If you missed this episode the first time around you’ll be pretty surprised by what you hear.
Main Topics
Bella and Katrina first discuss a big controversy in the pet sitting industry, which is misclassification of employees as either independent contractors or employees. Katrina outlines some key indicators that auditors look for in making that determination:
- Is there an actual contract between you and the contractor?
- Are your payments to them regular in nature?
- How much control do you have over them with regards to work hours, uniform, training, etc.?
- Do they offer the same services to other companies through their own business?
- Are you providing them all the tools, training, and supplies they need?
- Basically, consider how loose is the relationship?
They also discuss why they think business owners are so apprehensive about audits, what documents a business owner should have at their disposal if they are being audited, and whether business owners should take their lawyer and accountant to the audit. Katrina also gives some insight into what triggers an audit.
Show Highlights
- Who is Katrina Kadyszewski? [4:10]
- How does interpretation come into play with auditors? [6:20]
- Which documents should you have when being audited? [10:55]
- What is the goal of an auditor? [15:20]
- Should you get your lawyer or CPA involved when being audited? [17:15]
- How are businesses chosen for audits? [22:40]
- How far back should you be keeping records? [24:45]
- What is the VCSP (Voluntary Classification Settlement Program)? [26:00]
Original Show Notes
In this episode of “Bella In Your Business”, Bella talks with Katrina Kadyszewski, a former state auditor with the State of Connecticut.
Katrina has over 16 years of experience working in a variety of financial positions. She started in the brokerage industry with a Series 7, 63 and 65 and life and health license, and then transitioned to audit work for the CT Department of Revenue Services. She then left to support small businesses in their efforts to get organized for expansion.
Katrina spent 3 of her almost 8 years with the CT Dept. of Revenue Services in the Business and Employment Tax Audit Unit, focused primarily on payroll tax issues. The last 5 years she has worked as a Corporation Tax auditor, traveling across the US auditing largely Fortune 500 companies.
Resources
There are resources out there to help small business owners. Katrina and Bella suggest a few, like the IRS’s 20-factor test to help you determine employee or independent contractor status and amnesty programs that exist to help encourage business owners to make the right switch.
Have you ever been audited? Want to hear about pet sitters who have been audited? I have interviewed a handful and reported about it all here.
Transcript:
This is episode 151 of Bella in Your Business, The Best of Bella. Today I am featuring a Best of Bella episode. I want to take you all the way back to episode 20, which if you’ve started listening to us recently, you might not have had the pleasure to listen to it. I actually was able to track down a former Connecticut state auditor and what we discussed on this call was really remarkable.
I love it because for a few reasons. One, I really love being the first in the industry to do anything. And to the best of my knowledge, I don’t know any other industry leader interviewing auditors and talking specifically about pet sitting and dog walking. Second, I love it when I can bring these unique experts to you and have these candid conversations. I think you’ll be pretty surprised what her reflection was and what she had to say about business owners actually reaching out to the government and asking for their advice. So without further ado, enjoy this episode.
Welcome to Bella in Your Business, where Bella will discuss anything and everything about your pet sitting business to help you land on target. So get ready. Bella’s got your chute. Let’s jump.
Welcome to Bella in Your Business. My name is Bella from Jump Consulting, and today I have a real special treat for all you listeners. Today I have Katrina Kottachevsky, who has over 16 years of experience working in a variety of financial positions. She started in the brokerage industry with a series seven, 63, and 65 health license, and then transitioned to audit work for the Connecticut Department of Revenue Services before leaving to support small businesses in their efforts to get organized for expansion. Katrina spent three of her almost eight years with the Connecticut Department of Revenue in the Business and Employment Tax Audit Unit, which is why she’s here today. She focused primarily on payroll tax issues. The last five years, she worked as a corporation tax auditor, traveling across the U.S., auditing largely Fortune 500 companies.
So Katrina, thank you for being with us here today. I’m excited to be here. I think I mentioned to you, nobody ever wants to talk to an auditor or a government worker at that. They’re probably too shy or too afraid they’re going to say the wrong thing. But today we’re going to blow the lid off of it. Katrina, as you know, I kind of gave you a little background, and in the pet industry there’s a big controversy right now going on. It actually has been many years in the making about misclassification of workers being independent contractors or employees. And I’ve been very vocal. I take the stance of employees. I’ve even interviewed other pet sitters who have been audited. In fact, if you look back at episode seven of Bella in Your Business, you hear about one Texas worker who was audited and switched to employees because the Texas labor force told her that because her workers didn’t provide dog bowls, she therefore was applying materials and she had employees. It was just crazy. And Katrina, I know you listened to that one as well to kind of prepare for this, but I just am so excited to get your take on this. And I want everyone to know too that we met through good old-fashioned networking, which I always encourage people to do. Just talk to people, figure out what their story is, what they’ve done, and you never know what you can learn from it. So for those of you who don’t believe in networking, Katrina and I are the fruit of both of our networking efforts. So welcome again. Tell me more about yourself. Tell me the down-low of who Katrina really is, because I told the whole accolades, but now why don’t you give us an insight to who you are and about your auditing years.
Okay, well, like you mentioned, I initially started out in brokerage. It was just something that I fell into following an internship that I had in college, but it really wasn’t a great fit in my opinion to have a 21-year-old step into the workforce and start telling 65-year-olds where to put their nest eggs. I just felt like they should have a lot more market experience than I did. I stuck it out and gave it a shot, but ultimately it wasn’t a great fit for me. So then I switched basically from one of the fastest-paced industries to one of the slowest-paced: government work. I know everybody has their preconceived notions about people who work for the government. And I mean, I don’t want to say that they’re all untrue, but there are some of us who work very hard to do the right thing as public servants.
So I actually joined the Connecticut Department of Revenue Services. They had received some funding to initiate this business and employment tax audit group, which previously had not existed. There were about 10 of us hired on at the same time to address payroll tax and other business employment tax issues. And it was exciting to be part of something new. We had a really fresh group of people who were excited to learn together and grow together. And I mean, that was one thing that struck me the most when I listened to that podcast about the woman in Texas and her experience with that Texas Workforce Commission. It sounds like that was a really unfortunate experience with people who maybe just kind of took advantage or felt some power they had there, but it just sounds like a very unreasonable experience. It definitely wasn’t one that I had. We were all very focused on educating taxpayers and working with them to get them up to speed on what they needed to do.
Just if I can stop you there, because I don’t want this point to go by the wayside. You said unreasonable, but I think that’s just the very place that a lot of small business owners’ fears come from — that we’ve learned and heard so many stories of being the subject to one auditor’s interpretation of classification or payroll taxes or whatever it might be. I’ve even interviewed some people where it’s mostly the state that audits them. They’ve said, “Hey, do it X, Y, Z way.” So they do it, and then a year later they get audited again and get penalized for doing it that way, being told, “No, you should actually be doing it A, B, C way.” These small business owners feel so helpless. So I think you definitely perked my ears when you said unreasonable because I feel like — and I’d love for you to shed light on this — that’s where a lot of the fear starts.
That’s 100% true. At the end of the day, I think it was the management style to say we’re out there to educate taxpayers and help them report correctly. We’re not out there to threaten them or make them fearful of interacting with us. My experience with the state of Connecticut was that we wanted to help people get it right. I can’t speak for other commissions or departments, but I’ve also worked with the IRS and other examiners through the Multistate Tax Commission, and I’d say most of those people were reasonable and wanted to educate and teach the proper way.
That being said, government doesn’t have a lot of resources. So technologically, they’re behind, or the training isn’t always up to speed. Sometimes regulations and statutes change. And who goes home and reads those every night? No one. It’s just a lot of material. Understanding it and applying it — some things get lost in translation. It depends on the facts and circumstances of each case. I don’t know a ton about the pet sitting business; I understand the concept, but I’d imagine a lot of auditors don’t.
It’s uncanny. They don’t understand the industry, and for someone to think a dog bowl is a determining factor? It’s ludicrous. It would be ridiculous for an actual pet sitter to carry around their own dog bowl to each house. I don’t even understand what point they were trying to make. When we looked at misclassification, it was based primarily on how much control you have over the individual performing the work. I don’t know what a dog bowl has to do with that.
Part of the auditor’s responsibility is to immerse yourself in that industry and understand how it works. You talk to the owner, talk to staff, do your research. Review legal cases if there are any to reference. That’s how you understand context.
So, alright, I’m a small business owner and I’m being audited by the state. What kind of documents should I have at my disposal?
At the onset, we’d send a letter saying you’re under audit and here’s a list of the records we’d like you to make available — or you can send them to us. We’d ask for personal income tax returns if it’s a sole proprietor, or S-corp/partnership returns if not. We’d want payroll reports, typically over a three-year audit period. We’d also ask for federal and state W-4 forms, bank statements, and account info. One of the things we looked for was underreported wages — entrepreneurs paying personal expenses through the business that should be classified as wages.
We’d then look at misclassification issues — who you’re paying and for what services. If you’re paying a CPA, that’s fine; they’re a 1099. But if people are doing pet sitting for you, we want to see contracts, payments, regularity, and nature of work.
We’d ask: do you have an actual contract stating terms? Are you providing training, uniforms, setting hours, giving them tools like leashes or dog food, checking on them, setting client expectations, paying regularly, or reviewing their performance? Those are all signs of an employee relationship. The IRS has a 20-factor test for this.
We encourage that if you have independent contractors, they should be registered with the state for their own business. If not, that’s a flag — especially if they only work for you, same clients, same hours, week after week. That’s more like an employee.
You mentioned the state looks for revenue through audits. Their intent is to find misclassified workers who should be employees, meaning more tax revenue. That’s true, though even as independent contractors, taxes should still be reported — just differently. But yes, unpaid taxes, unemployment comp, and workers’ comp premiums are all affected. Departments share information with the IRS and Labor Department to decide who to audit.
If I’m being audited, should I go myself or send my CPA or lawyer?
It depends. If bookkeeping isn’t your strength, hire representation — a CPA or someone who knows tax law. But you should still be involved. Don’t let someone handle it entirely for you, because if they’re slow or unresponsive, it looks worse.
Sometimes business owners say, “My CPA said it’s okay if I do it this way.” But that CPA won’t be there to defend you. It comes down to how much risk you’re willing to take. If a CPA says that, ask for documentation to support their advice. Interview multiple CPAs or lawyers who understand employment law. And you can always contact the IRS or your state department for guidance.
Audits can be random or targeted, and yes, it’s better to know ahead of time than to be surprised. Typically, the audit period covers three years, but it can go further back if there’s fraud or evasion. Departments share data with other agencies and can flag you based on mismatched filings or patterns.
Sometimes the government runs amnesty programs — voluntary disclosure initiatives. You can come forward, pay what’s owed, and often get reduced penalties. It’s better than waiting and risking full fines later.
Most issues aren’t black and white; they’re gray and open to interpretation. That’s why the 20-factor test exists. Maybe 10 factors lean your way, 10 don’t, but a couple carry more weight. If you are found at fault, payment plans are usually available. Governments want revenue; they’re willing to negotiate if you cooperate.
People fear audits like Pandora’s box, but they don’t have to. I was hired specifically to identify payroll tax issues, and more states are focusing on misclassification each year because it’s a big revenue stream. Different states work with the feds, sharing data and comparing notes.
I’m so grateful for your time and your insight because you’ve given us a safe perspective from the other side. It’s scary to call an auditor and ask questions. That being said, if this podcast reaches more listeners and we get questions, would you be open to coming back?
Oh, certainly. I’d love to help however I can. I don’t like the idea that there’s so much fear out there.
There really is. Ninety-nine percent of it is fear. I like to bring light and give people facts so they can let go of that fear. Katrina, from the bottom of my heart, thank you so much for joining us today. Please feel free to comment, share, spread, like, subscribe to the blog, and post your comments or questions for Katrina — we can get her back on like she said. And thanks for listening, everyone.
Thanks for jumping with Bella in Your Business. For more information, free articles, free coaching sessions, and more, go to JumpConsulting.net. And remember, Bella’s got your chute.