Is the IRS' Voluntary Worker Classification ... - Big Fat Finance Blog

Classifying a worker as an employee or an independent contractor has significant consequences for a business, as employees are covered by a host of labor laws and tax regulations that typically don?t apply to contractors. Last week, the IRS launched a program, under its ?Fresh Start,? initiative, that it says will help employers resolve issues around worker classification.

The program appears to be geared to employers who had classified workers as contractors when they more accurately would have been classified as employees. The ?Voluntary Classification Settlement Program? (VCSP) allows employers to begin complying with worker classification regulations by voluntarily reclassifying their workers as employees and making a payment generally equal to 10 percent of the employment tax liability that may have been due on the worker?s compensation for the most recent tax year, according to this explanation of the program from the IRS.

Participating in the program offers businesses some compelling benefits. Other than the payment described above, no interest or penalties will be owed. In addition, employers won?t be audited regarding the prior years? payroll taxes.

However, employers in the program will, for the first three years, work under a six-year statute of limitations regarding the assessment of employment taxes, instead of the three-year limitation that generally applies with payroll taxes. And, while a company doesn?t need to reclassify all its employees, all those in the same class must be treated as employees for employment tax purposes, according to this Q&A from the IRS.

Not everyone is convinced that the program is all that it?s cracked up to be. Under Section 530 of the Revenue Act of 1978, which deals with worker classification, ?reclassification of a worker from independent contractor to employee for tax purposes can only have prospective effect. There is no legal basis for assessing employment tax, penalties, or interest with respect to such worker for a prior period,? writes attorney Stephen J. Dunn in Forbes.

Given this, one has to question why an employer would voluntarily agree to pay employment tax for a worker previously classified as an independent contractor for a prior period. Moreover, Dunn notes that worker classification issues seldom are raised in audits, because an employer almost always has a rational reason for classifying a worker as a contractor.

Still, for business execs concerned that they may have been misclassifying some workers, the Program offers a way to come clean. ?For businesses that are prepared to treat their workers as employees, the VCSP offers an attractive alternative to the risk of an IRS audit?? according to this brief by the law firm Bingham McCutchen.

The VCSP is available to businesses, tax-exempt and government entities that have consistently treated workers as non-employees but that are interested in changing their classification prospectively; that filed all required Forms 1099 for these workers in the previous three years; and that are not currently under audit by the IRS, the DOL or a state agency regarding the workers? classification. An employer who was audited in the past about its worker classification can apply for the program if it complied with the results of the audit.

Employers interested in the program need to complete IRS Form 8952, Application for Voluntary Classification Settlement Program. The employer also needs to provide the name of a contact or representative with a valid power of attorney.

The IRS will contact the taxpayer, or its representative, once it has reviewed the application and verified eligibility.

Source: http://bigfatfinanceblog.com/2011/09/29/is-the-irs-voluntary-worker-classification-program-a-good-deal-for-employers/

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