New Ways to Settle Worker Classification
March 27, 2012
The IRS is offering a unique opportunity to employers who have misclassified workers as independent contractors rather than as employees. Under a special IRS program, an employer may volunteer to settle the tax debt for a minimal amount. Generally, employers are predisposed to treat certain types of workers as independent contractors to save on payroll taxes and employee benefits. But the issue is often contested by the IRS. It can result in hefty tax obligations and penalties. New direction: Under the Voluntary Classification Settlement Program (VCSP), eligible employers can obtain relief if they agree to prospectively treat workers as employees. The VCSP is generally available to businesses, tax-exempt organizations and government entities that are mistakenly treating their workers or a class or group of workers as independent contractors. To be eligible, the employer • must have consistently have treated the workers in the past as non-employees • must have filed all required Forms 1099 for the workers for the previous three years • cannot currently be under audit by the IRS or the Department of Labor or a state agency concerning the classification of these workers Interested employers should apply for the program at least 60 days before they want to begin treating the workers as employees. Employer accepted into the program will pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers for the past year. No interest or penalties will be due, and the employers cannot be audited on payroll taxes related to these workers for prior years. For the first three years under the program, participating employers will be subject to a special six-year statute of limitations, rather than the usual three-year period.