Employee classification is a hot button with the Internal Revenue Service (IRS). If you are aware of some classification misalignments in your company, the IRS Voluntary Classification Settlement Program (VCSP) could be the program you have been waiting for.
Employment tax disputes come up all the time. Problems arise when an employer is paying workers cash and not reporting them on their payroll. If there is an injury in the workplace, and there is no workers’ comp in place for the employee, things can get sticky. As well, so-called independent contractors who are essentially acting as employees become a problem at about the same time—when injuries happen, a payroll is audited, or a disgruntled employee finds out they do not have access to social net programs because their employer did not pay into Social Security on their behalf.
The IRS considers the willful misclassification of employees as tax fraud. An employer can avoid paying taxes and workers’ compensation on workers classified as independent contractors. Recent political battles in California resulted in gig workers maintaining their status as independent contractors. For some workers this was a victory, not so for others.
The IRS lays out some basic dividing lines for who is an employee and who is a contractor. The distinctions run along the lines of who controls or provides work assignments, how a worker is paid and reimbursed, and what kind of working relationship and benefits are in place.
For employers who are aware that some portion of their workforce is improperly classified, the IRS offers a voluntary settlement program that provides some benefits for correcting employee misclassifications. Some points of the program include:
- Application to the program is required and the IRS notes, “a taxpayer must have consistently treated the workers to be reclassified as independent contractors or other non-employees, including having filed all required Forms 1099 for the workers to be reclassified under the VCSP for the previous three years to participate.”
- An employer cannot be the subject of a current employment tax audit, or other investigation or litigation, concerning classification of employees.
- By agreeing to classify the identified workers properly going forward, the employee will pay 10 percent of the tax liability that would otherwise have been due on compensation paid to the workers for the most recent tax year. The employer will not be liable for penalties or interest on the amount and the employer will not be subject to an employment tax audit for prior years on the workers identified for classification.
The VCSP offers an avenue toward compliance at a reduced cost. That said, if there are other questionable tax or employment practices in place at your company, it is a good idea to talk with a reputable tax attorney before applying to the program.
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The legal group at Robert J. Fedor, Esq., LLC provides strategic solutions to complicated tax problems for businesses and individual clients around the world. When you need focused compliance advice, are considering bankruptcy relief, or if you receive correspondence from the IRS—contact us or call 800-579-0997.
