A Fresh Start
Employers and the Internal Revenue Service have long battled over proper employee classification. The question of whether a worker is an employee or an independent contractor is complex. While there is no cut and dry definition of who is an employee, making the wrong determination can cost you.
Employers are required to withhold federal income tax, to withhold and contribute a matching portion of FICA and Medicare, and to submit Federal Unemployment Taxes. However, if your workers are independent contractors, the only reporting requirement is Form 1099-MISC for payments that exceed $600. Problems arise when employers treat workers as independent contractors, and the IRS disagrees with this treatment. The employer can then be held liable for back payroll taxes, along with severe penalties and interest. Not to mention the affect this can have on benefit plans.
Currently the IRS is aggressively trying to reduce the annual gap between taxes paid and taxes owed. That may be bad news for employers who have been pushing the envelope with regards to employee classification. The IRS has however, recently launched a "Fresh Start" initiative to help employers meet their tax responsibilities. One part of this initiative is the Voluntary Classification Settlement Program (VCSP). This program allows employers to reclassify employees that have been erroneously classified as independent contractors. The program has generous payment terms and relief from employment tax audits for previous years, if employers agree to prospectively treat workers as employees. To be eligible an employer must:
• Have consistently treated the workers as non-employees in the past • Have filed all required Forms 1099 for the past three years • Not currently be under audit by the IRS, Department of Labor or a state agency concerning employee classification issues Employers can choose to reclassify some or all of their employees. Once an employer chooses to reclassify certain workers as employees, it must treat all workers in the same class as employees. Interested employers can apply for the program by fi ling Form 8952 at least sixty days before the date you want to begin treating the class of workers as employees.
This is not a decision to be made lightly. Agreeing to treat workers as employees can have far reaching effects and should only be done after weighing all of the costs and benefits.
