In a recent IRS news release (IR-2011-95), the service launched a new program that will enable many employers to resolve past worker classification issues and achieve certainty under the tax law at a low cost by voluntarily reclassifying their workers.
For an example of how this might work assume a company has 5 workers making $50,000 each for the past years. There are three potential outcomes and they are summarized below. The first column includes all 3 years and a 40% tax due to a willful misreporting. The second column assumes an audit and a determination of non willful misreporting. The third column shows the cost under the new program.
| Wilful Misreporting | Non-Wilful Misreporting | New IRS Settlement Program | |
|---|---|---|---|
| Wages subject to tax | $750,000 | $250,000 | $250,000 |
| Tax Liability | $300,000 | $ 26,700 | $ 2,670 |
This new program will allow employers the opportunity to get into compliance by making a minimal payment covering past payroll tax obligations rather than waiting for an IRS audit.
This is part of a larger “Fresh Start” initiative at the IRS to help taxpayers and businesses address their tax responsibilities.
“This settlement program provides certainty and relief to employers in an important area,” said IRS Commissioner Doug Shulman. “This is part of a wider effort to help taxpayers and businesses to help give them a fresh start with their tax obligations.”
The new Voluntary Classification Settlement Program (VCSP) is designed to increase tax compliance and reduce burden for employers by providing greater certainty for employers, workers and the government. Under the program, eligible employers 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, an applicant must:
• Consistently have treated the workers in the past as nonemployees,
• Have filed all required Forms 1099 for the workers for the previous three years
• Not currently be under audit by the IRS
• Not currently be under audit by the Department of Labor or a state agency concerning the
classification of these workers
Interested employers 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.
Employers 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 will not be audited on payroll taxes related to these workers for prior years. Participating employers will, for the first three years under the program, be subject to a special six-year statute of limitations, rather than the usual three years that generally applies to payroll taxes.
This is a good time for businesses to review any 1099’s issued over the past three years and determine if the worker who performed services should have been properly treated as employee. The answer can sometimes be more of a grey area as the overall facts and circumstances of the relationship should be considered. The most relevant factor is whether the business has the right to direct and control the worker as to how to perform the services.
As of now there is no time limit or expiration on the program. The VCSP program piggybacks on an existing Classification Settlement Program (CSP) that is only for taxpayers already under examination. It looks as if both programs will have some staying power. The application can be filed at anytime, however it should be filed 60 days before the business wants to begin treating the applicable workers as employees.
There could some pitfalls to consider as there is no safe haven provided for overtime payments or for benefits the workers may have been entitled to as employees. I recommend consulting a tax professional before applying. Please contact us if you would like a referral to an accountant or labor law attorney to help you with this program. Or if you need a payroll service to help you with those newly classified employees please contact us for that too.
