If You’ve Misclassified Workers, IRS Program Can Help

By Karen Axelton

Has your business classified workers as independent contractors who should really be classified as employees? This sensitive issue is a big concern for small business owners. More and more entrepreneurs are relying on independent contractors to handle their workloads, but the definition of “independent contractor” can be hazy. The Department of Labor is taking new aim at this problem for 2012, according to Compensation Café, and is joining with the IRS to share information, help reduce misclassification of employees and improve employer compliance.

The Labor Department will be focusing on enforcing laws and auditing employers, but the IRS is being a bit more forgiving. The agency’s Voluntary Classification Settlement Program, part of its “Fresh Start” initiative, allows business owners to come forward voluntarily and settle their misclassification issues instead of trembling in fear of an audit.

VCSP has several advantages:

• Businesses can reclassify workers as employees for future tax periods and pay just 10 percent of the employment tax liability that results from this reclassification for the most recent tax year.
• There are no penalties or interest on the employment tax liability.
• The IRS will not audit your business on these workers’ classifications for prior years.

However, it’s not all peaches and cream. In order to get these terms, you must agree that the standard three-year “look-back” window for the IRS to review your employment taxes (and see if you owe more money) is extended to six years.

To apply for VCSP, complete Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before you want to begin treating the workers as employees. Your business must also meet these eligibility criteria:

• Workers to be reclassified must have been consistently treated as non-employees;
• Employer must have filed the appropriate 1099 forms for the prior three years;
• Employer cannot currently be undergoing a classification audit by the IRS, Department of Labor or any state agency;
• If the employer was previously audited by the IRS, DOL or any state agency, it must have complied with the results.

Being accepted into the VCSP program is not automatic; however, even if the IRS rejects your application, the agency has said that this rejection doesn’t automatically trigger an audit of your business. You are also allowed to reapply for the program in the future.

Compensation Café notes, however, that although the IRS and the DOL are collaborating on this issue, the DOL isn’t offering amnesty. That means participating in the VCSP program could lead to your business being assessed back taxes, penalties and fines by the DOL and/or state agencies. So before plunging into VCSP headfirst, talk to your accountant to determine how this could affect your payroll, benefits programs, unemployment and workers compensation insurance, and the possible additional penalties you might face.

Image by Flickr user MoneyBlogNewz (Creative Commons)

This entry was posted on Tuesday, January 17th, 2012 at 6:00 am and is filed under Accounting and Taxes, Business Law, Compliance, Small Business, small business. You can follow any responses to this entry through the RSS 2.0 feed.


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