Back in September the IRS came out with a ramped up version of the “Fresh Start” initiative, aimed at allowing employers to voluntarily reclassify their employees at a fraction of the price.
The IRS estimates that millions of companies have improperly classified their workers resulting in loss revenue of 3.4 billion dollars. The IRS, DOL, and State agencies have all been stepping up their efforts in enforcing employees are properly classified.
A few business blatantly use contract workers as employees, but the majority of business do so mistakenly and realize their mistake at a later time. Other companies properly use independent contractors when they are small and then as they grow are using them as actual employees.
While employers can legitimately see some grey areas what constitutes a 1099 worker or a W-2 employee, but the IRS is more black and white on this issue.
The IRS has a set of 20 key areas used to determine whether a worker is an actual employee, but behavioral control and financial control are the main factors. Employers can also submit a SS-8 to the IRS if they would like the IRS to make the decision for them.
If an employer is audited and determined to be using a independent contractor as an employee, some serious consequences can follow.
1. The employer will be subject to penalties and interest.
2. The employer will have to pay payroll taxes on the employee from the time they were hired. Often times the employer will also have to pay the employees portion of the taxes also.
The Voluntary Classification Settlement Program (VCSP) was announced last September (2011) just prior to the Department of Labor and IRS agreeing to exchange information with each other in a combined effort to curb miss classification.
Under the VCSP employers can properly classify their workers as employees. They will only have to pay what amounts to 10% of payroll taxes for the most recent tax year only. The employer will not be audited for past payroll matters either. The employer must agree to continue to consider the workers reclassified as employees for future tax periods. The employer must have also properly filled out 1099’s for each employee for the last three years and currently not be under an audit by either the IRS or the DOL.
Since September several questions aroused about certain repercussions that can happen to employers that do take advantage of this program, so early in 2012 the IRS released a key update.
1. The IRS will NOT share any information of VCSP applications with the DOL or state agency
2. Signing the VCSP final agreement is not an admission of quilt or wrong doing. Prior years of payroll taxes will also not be subject to auditing.
3. Rejection of a VCSP application will NOT trigger an audit
4. A call from an IRS agent about an SS-8 change is not considered an audit and can still be eligible for this program.
This is a great opportunity for employers who know they have misclassified employees and want to come clean. Having to pay only 10% of the previous tax years payroll tax responsibilities sure beats 100% for the last 3 years.
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