Feds offer partial amnesty for contractor misclassification

September 27, 2011
in Employment Law

If you’ve been worried that some of your workers may be incorrectly classified as independent contractors, but leery about opening a legal can of worms to fix potential problems, Uncle Sam is offering to cut you a break.

Under a new program, the Internal Revenue Service is willing to waive fines and interest penalties for employers that reclassify as employees any workers currently misclassified as contractors. The partial amnesty is part of the IRS’s new Voluntary Classification Settlement Program (VCSP), which was announced Sept. 21.

The trade-off: Instead of paying penalties and interest for misclassifying workers, VCSP participants will be liable for just over 1% of the wages paid to those reclassified workers for the past year. Even better: No penalties or interest will be due, and the IRS will back off on audits related to these workers for earlier years.

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Participation in the program is open to employers that currently treat workers as independent contractors, but wish to reclassify them as employees for future years.

There’s no deadline to participate in the VCSP.

To participate, you must file Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before you want to change these workers’ status. The IRS retains discretion to accept your application. In addition, you must meet these four criteria:

  1. You must consistently have treated these workers as independent contractors.
  2. You must have filed Forms 1099-MISC for these workers for the previous three years.
  3. You must not currently be under audit by the IRS, the Department of Labor (DOL) or a state agency with respect to these workers.
  4. If you have undergone an IRS or DOL worker classification audit, you must be in compliance with the results of the audit.

If the IRS accepts your application, you will be required to enter into a closing agreement and pay the full amount due. Finally, for your first three years in the program, you will be subject to a special six-year statute of limitations, rather than the usual three-year limit.

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Advice: Think twice before turning down the IRS’s VCSP offer. Announcing the new program, the IRS reiterated that it plans to continue an aggressive payroll audit program. If you choose not to participate in the VCSP and get snagged for misclassifying workers, you will be liable for a penalty equal to:

  • 1.5% of the wages paid
  • 20% of the employee’s share of FICA
  • The full employer FICA rate
  • All federal unemployment (FUTA) taxes.

IRS payroll audits can go back three years.

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Freelancers and independent contractors are a familiar component of today’s lean and mean American business scene. They can ease your workload without adding expensive full-time worker costs to your budget.

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  • How to negotiate a fair price with an independent contractor
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