Minnesota Department of Revenue – Worker Classification Voluntary Compliance Initiative

The Minnesota Department of Revenue recently launched a limited pilot program to allow businesses to convert workers from independent contractors to employees with reduced consequences for Minnesota withholding tax. This program is known as the Worker Classification Voluntary Compliance Initiative and is currently available only through December 16, 2011.

The Department’s pilot program will closely follow the qualification and application process of the Voluntary Classification Settlement Program (VCSP) recently announced by the Internal Revenue Service and discussed is the preceding blog article.

To qualify for the state program, the business must meet all of the eligibility requirements for the VCSP (See Form 8952 and the previous article in this blog). The business must also:

1. be an active business with Minnesota employees;
2. agree to register for Minnesota withholding tax (if not registered);
3. furnish information identifying the misclassified workers and the compensation paid to each worker;
4. pay a tax at the rate of 3% of compensation [wages] paid to the affected workers for the calendar year 2010;
5. agree to treat all workers in the affected classes as employees beginning January 1, 2012 and for all periods thereafter, unless the relationship between the worker and the employer changes; and,
6. upon request from the Department of Revenue, make records available for audit to verify the tax liability and the accuracy of any statements.

The benefits to the business include:

1. Avoiding all penalties and interest.
2. Limiting the tax obligations for past tax periods.
3. Eliminating the risk that the Department may assess tax for a minimum of 3½ years or longer if Minnesota withholding tax returns have not been filed.
4. Avoiding an audit.

To participate, the business must complete and submit Internal Revenue Service Form 8952, with a cover letter indicating that the business wants to apply for the Minnesota Voluntary Compliance Initiative. The business must write across the top of the form, Minnesota Worker Classification Voluntary Compliance Initiative The business must also attach a worksheet to show its calculation of the amount due Minnesota, as follows:

1. Calendar year 2010 compensation paid to all classes of workers to be reclassified (from Line 18, Column C of federal form 8952).
2. Compensation from Line 1 paid for work performed by Minnesota residents or work performed in Minnesota by nonresidents.
3. Multiply the amount of Line 2 by 3 percent (.03). This is the Minnesota VCI payment.

WARNING! As explained in the preceding blog article, converting independent contractors to employees can have significant implications far beyond the taxes owed to the IRS and the Department of Revenue. Please carefully review the impact this conversion with have on the business’ obligations under all of the laws concerning employees. Some of these laws are listed in the preceding blog article.

For more information about the state program, contact: Voluntary Compliance Program, Attn: Jessica Swanson, Minnesota Department of Revenue, Mail Station 6501, St. Paul, MN 55146-6501. Phone: (651) 556-4034. Fax: (651)556-5152. Email: [email protected]