Federal Employment Taxes: Employee-Independent Contractor Issues (Part 4)

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IRS Voluntary Worker Classification Settlement Program

Employers that have workers which the employer classifies as “independent contractors” (Form 1099) risk having these workers reclassified by the IRS as employees. This classification is a major audit area for the IRS. If the IRS does audit an employer and reclassifies “contractors” as “employees” this will subject the employer to substantial federal employment tax liabilities, penalties, and interest. The employer will also be required to treat the “reclassified” contractors as employees going forward.

If an employer believes it may be incorrectly treating its workers as contractors, rather than as employees, the IRS has a voluntary worker classification settlement program (VCSP) that may be available to the employer and which can provide significant benefits to the employer.

The VCSP is only available to an employer who has not been subject to an employment tax audit and where the employer may voluntarily apply with the IRS to re-classify its workers from contractors to employees. Form 8952, Application for Voluntary Classification Settlement Program, should be used by the employer for this purpose. The IRS does not share information about a VCSP application or the IRS determination with state taxing agencies.

Under the VCSP, if the employer’s application is granted, the employer must treat its workers prospectively as employees for federal employment tax purposes and sign a Form 906, Closing Agreement. This form is where the employer pays 10% of the federal employment tax liability on its workers for the current tax year, and with this liability determined under reduced tax rates. Penalties and interest are also not due, and the IRS will not audit and re-classify the workers for prior tax years.

The IRS also has a separate worker classification settlement program for employers under examination (CSP), but the terms of the CSP are not as beneficial to an employer as those under the VCSP. The CSP requires payment of federal employment taxes for a single audit year and where the amount of these taxes can be the full amount of taxes for one year, or a reduced 25% rate for one year. The employer must sign a Form 906, Closing Agreement, and must treat workers prospectively as employees.

 

IRS Voluntary Worker Classification Settlement Program

Employers that have workers which the employer classifies as “independent contractors” (Form 1099) risk having these workers reclassified by the IRS as employees. This classification is a major audit area for the IRS. If the IRS does audit an employer and reclassifies “contractors” as “employees” this will subject the employer to substantial federal employment tax liabilities, penalties, and interest. The employer will also be required to treat the “reclassified” contractors as employees going forward.

If an employer believes it may be incorrectly treating its workers as contractors, rather than as employees, the IRS has a voluntary worker classification settlement program (VCSP) that may be available to the employer and which can provide significant benefits to the employer.

The VCSP is only available to an employer who has not been subject to an employment tax audit and where the employer may voluntarily apply with the IRS to re-classify its workers from contractors to employees. Form 8952, Application for Voluntary Classification Settlement Program, should be used by the employer for this purpose. The IRS does not share information about a VCSP application or the IRS determination with state taxing agencies.

Under the VCSP, if the employer’s application is granted, the employer must treat its workers prospectively as employees for federal employment tax purposes and sign a Form 906, Closing Agreement. This form is where the employer pays 10% of the federal employment tax liability on its workers for the current tax year, and with this liability determined under reduced tax rates. Penalties and interest are also not due, and the IRS will not audit and re-classify the workers for prior tax years.

The IRS also has a separate worker classification settlement program for employers under examination (CSP), but the terms of the CSP are not as beneficial to an employer as those under the VCSP. The CSP requires payment of federal employment taxes for a single audit year and where the amount of these taxes can be the full amount of taxes for one year, or a reduced 25% rate for one year. The employer must sign a Form 906, Closing Agreement, and must treat workers prospectively as employees

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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