Misclassification of Workers | Smith, Kunz & Associates

Misclassification of Workers

December 17, 2014

New Voluntary Classification Settlement Program

Misclassification of Workers

Many businesses pay workers as subcontractors instead of employees to avoid payroll taxes. This misclassification may save the business some money in the short term, but back taxes in addition to hefty penalties and interest can be a crippling blow down the road.

As the public places more pressure on the Federal government to operate at a surplus, the Federal government in turn places more pressure on the IRS to collect taxes. One of the areas for increased enforcement identified by Congress, the President, and the IRS is the misclassification of workers. Just this month, the Department of Labor and the IRS signed an agreement to increase their sharing of information about employee misclassification. This issue is very high on their priority list.

New Program – Voluntary Classification Settlement Program

In what has been described as, “the carrot of a carrot and stick approach,” the IRS just announced the Voluntary Classification Settlement Program (VCSP). This new program will enable employers to voluntarily reclassify their workers for federal employment tax purposes and take advantage of a reduced penalty and audit protection. The IRS also released Form 8952, Application for Voluntary Classification Settlement Program, and Instructions, and posted frequently asked questions (FAQs) about the VCSP on its website.

Eligibility

The VCSP is open to taxpayers currently treating their workers as independent contractors or other non-employees and that want to prospectively treat the workers as employees. The taxpayer must have consistently treated the workers as non-employees, and must have filed all required Forms 1099 for the workers for the three preceding calendar years ending before the date Form 8952 is filed. In the case of a taxpayer that has only been in business for two years, the filing requirement will be deemed satisfied if the taxpayer has provided Forms 1099 to workers for the time they worked for the taxpayer.

The taxpayer cannot currently be under audit by the IRS or DOL. A taxpayer previously audited by the IRS or DOL may be eligible for the VCSP if the taxpayer has complied with the results of that audit.

Form 8952

Taxpayers will use form 8952 to apply to the VCSP. The IRS advised taxpayers to file Form 8952 at least 60 days from the date the taxpayer wants to begin treating its workers or class of workers as employees.

The IRS will review Form 8952 and verify the taxpayer’s eligibility. If the taxpayer is accepted into the VCSP, the IRS will contact the taxpayer to enter into a closing agreement. The IRS will notify taxpayers if their VCSP application is rejected.

Audit protection and more

In exchange for agreeing to prospectively treat workers as employees for future tax periods, taxpayers:

  • Will pay a percentage of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year, determined under the reduced rates of Code Sec. 3509(a).
  • Will not be liable for any interest and penalties on the amount; and
  • Will not be subject to an employment tax audit with respect to the worker classification of the workers being reclassified under the VCSP for prior years.

Limitations period

For the first three years under the program, taxpayers are subject to a special six-year statute of limitations, rather than the usual three years that generally applies to payroll taxes.

Summary

If you’re unsure about how to classify your workers and/or you think the workers you have been paying as subcontractors could really be classified as employees, please call us immediately at (208) 356-8500 to see if you should take advantage of this new program. Reduced taxes, no interest and penalties, and audit protection are things very rarely offered by the IRS.