Many companies are struggling with the problem of determining how to properly classify their workers. Are they employees or independent contractors? As explained in earlier articles, the IRS has been motivated for a variety of reasons to reclassify independent contractors as employees. Businesses have been reluctant o reclassify their workers because of the significant costs of treating them as employees. One of those costs is the additional back taxes that may be owed to the IRS.
On September 21, 2011, the Internal Revenue Service announced a new program that will enable many businesses to resolve past worker classification issues and avoid significant obligations to the IRS. This new program, the Voluntary Classification Settlement Program (VCSP), will allow businesses to convert their workers to employees by making a minimal payment covering past payroll tax obligations rather than waiting for an IRS audit.
Eligible businesses can obtain substantial relief from federal payroll taxes they may have owed for the past, if they prospectively treat workers as employees. The VCSP is available to many businesses, tax-exempt organizations and government entities that currently erroneously treat their workers or a class or group of workers as nonemployees or independent contractors, and now want to correctly treat these workers as employees.
To be eligible, the business must:
1. Consistently have treated the workers in the past as nonemployees;
2. Filed all required Forms 1099 for the workers for the previous three years;
3. Not currently be under audit by the IRS;
4. Not currently be under audit by the Department of Labor or a state agency concerning the classification of these workers.
Interested businesses can apply for the program by filing Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before they want to begin treating the workers as employees.
Businesses participating in the program will receive the following benefits:
1. Pay an amount effectively equaling just more than one percent of the wages paid to the reclassified workers for the past year;
2. Pay no interest or penalties;
3. Not be audited on payroll taxes related to these workers for prior years.
Businesses will also be subject to additional obligations. For the first three years under the program, the business will be subject to a special six-year statute of limitations, rather than the usual three years that generally applies to payroll taxes.
WARNING! The IRS is only one of the many federal and state agencies that care about how a business classifies its workers. This agreement is only with the IRS. By reclassifying its workers as employees, the business is also potentially exposing itself to additional liabilities under other laws and with other federal and state agencies:
1. Employee Retirement and Income Security Act (ERISA) administered by the Pension Benefit Guarantee Corporation
2. Fair Labor Standards Act (FLSA) administered by the Wage and Hour Division of the U.S. Department of Labor
3. National Labor Relations Act (NLRA) administered by the National Labor Relations Board
4. Title VII (Civil Rights Act) administered by the Equal Employment Opportunity Commission
5. Age Discrimination and Employment Act of 1967 (ADEA) administered by the Wage and Hour Division of the U.S. Department of Labor
6. Americans with Disabilities Act (ADA) administered by the Equal Employment Opportunity Commission
7. Federal Tort Claims Act
8. Genetic Information Nondiscrimination Act of 2008 (GINA) administered by the Equal Employment Opportunity Commission
9. Minnesota Workers’ Compensation Act administered by the Minnesota Department of Labor and Industry
10. Minnesota State Unemployment Compensation administered by the Minnesota Department of Employment and Economic Development
11. Minnesota Fair Labor Standards Act administered by the Minnesota Department of Labor and Industry
12. Minnesota Income Tax Withholding administered by the Minnesota Department of Revenue.
Before participating in the IRS program, thoroughly discuss the full impact of this reclassification with your attorney.
For details about the IRS VCSP, including FAQs, go to the IRS VCSP FAQs and Announcement 2011-64.