The proper classification of a worker as an "employee" or "independent contractor" is one of the more important, but sometimes confusing, tasks faced by a business. In earlier posts, I've provided guidance on making the right classification and warned of enhanced efforts by governments looking to force reclassifications to increase tax revenues. Misclassification is often described in stories of unethical businesses or over-zealous law enforcement. Today's post falls in between those extremes, where businesses struggle, but sometimes fail, to make the right decisions, and government agencies want not to punish but to create a reasonably level playing field.
Recently, the IRS, the U.S. Department of Labor, and eleven states (the initial group did not include Colorado, but look for more states to join) announced agreements for the sharing of information and cooperation in the enforcement of classification laws.
Business models that attempt to change, obscure or eliminate the employment relationship are not inherently illegal, unless they are used to evade compliance with federal labor laws - for example, if an employee is misclassified as an independent contractor and subsequently denied rights and benefits to which he or she is entitled under the law. In addition, misclassification can create economic pressure for law-abiding business owners.
While that announcement seems less about helping, and more about hammering, out-of-compliance companies, in a separate announcement the IRS makes it clear that at least part of the federal government is interested in aiding the businesses that want to correct misclassification missteps. The Voluntary Classification Settlement Program (VCSP) was announced as the latest part of the IRS Fresh Start initiative. Businesses that have misclassified employees as independent contractors may be eligible to reclassify the workers with limited tax liability.
Employers accepted into the program will pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers for the past year. No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years. Participating employers will, for the first three years under the program, be subject to a special six-year statute of limitations, rather than the usual three years that generally applies to payroll taxes.
Not all businesses are eligible for VCSP; however, participation is limited to those employers who:
Other factors should be considered before joining the program. VCSP isn't a complete clean slate. A business that misclassified workers may still have exposure for state or local taxes as well liability to the workers for wages or benefits. Talk to your business attorney about any worker classification concerns and the opportunity of VCSP. Just don't wait too long. If IRS/DOL/States initiative is successful, more businesses will be audited for misclassification and then it will be too late to apply for a voluntary settlement.
Read more posts about business law by Jim Thomas at his blog, No Funny Lawyers
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