The IRS recently introduced a new amnesty program entitled the Voluntary Classification Settlement Program (VCSP) that permits taxpayers to voluntarily reclassify workers as employees for federal employment tax purposes. The VCSP is an optional program that provides eligible taxpayers that are currently not under examination with an opportunity to reclassify some or all of their independent contractors as employees for future tax periods, with limited federal employment tax liability for the past non-employee treatment. Taxpayers participating in this program will: (1) only pay 10% of the employment tax liability that might otherwise have been due to the IRS for the most recent tax year; (2) not be liable for any interest and penalties on the liability; and (3) not be subject to employment tax audits by the IRS regarding worker classification for prior years.
Classification is a Factual Determination
For Federal tax purposes, the determination of whether a person is properly classifiable as an employee or an independent contractor is a factual one. Generally, the IRS uses the following characteristics to determine the relationship between a taxpayer and its workers: (1) behavioral control (i.e., whether the business has a right to direct or control how the work is done through instructions, training or other means; (2) financial control (i.e., whether the business has a right to direct or control the financial and business aspects of the workers job); or (3) type of relationship (i.e., how the workers and the business owner perceive their relationship). The IRS has developed a “20-Factor” test for determining whether a worker is an employee or an independent contractor. If you are not familiar with the Service’s guidelines for determining compliance in this area, take a look at the article, Seven Tips for Business Owners on irs.gov.
Eligibility
In order to be able to participate in the VCSP, taxpayers must meet certain eligibility requirements and certify that they meet these requirements on Form 8952, Application for Voluntary Disclosure Classification Settlement Program. More specifically, taxpayers must: (1) be presently treating the workers as non-employees; (2) have satisfied any Form 1099 requirements for each of the workers for the 3 preceding years before the date Form 8952 is filed; (3) be consistent in the treatment of workers as non-employees; (4) have no dispute with the IRS as to whether the workers are non-employees or employees for federal employment tax purposes; and (5) not be previously or currently under examination by the IRS or the U.S. Department of Labor (DOL) for classification of workers. Form 8952 may be filed at any time. However, the form must be filed at least 60 days before the taxpayer wants to begin treating the class or classes of workers as employees.
Why Now is the Time - Increasing Federal and State Pressure
In September of last year, the DOL issued a press release that described its increasing focus on “employee misclassification compliance and education.” In it, the DOL announced the existence of multiple memorandums of understanding it was entering together with state agencies in “Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah and Washington.” Federally and at the state level, these agencies plan to keep a closer eye on employee classification and coordinate enforcement “in order to level the playing field for law-abiding employers and ensure that employees receive the protections to which they are entitled under federal and state law.”
Consequences of Noncompliance
Taxpayers that fail to take advantage of the VCSP and who are later found to be noncompliant, will not only be liable for all associated employer’s taxes plus interest, they will also be responsible for their employee’s share of FICA taxes, as well as other penalties. Noncompliance also places any contracts a taxpayer may have with federal or state government clients at risk.
For more information about the VCSP, visit this page on the IRS website. Also, feel free to reach out to MFA for insight and help with employee misclassification compliance or to discuss key state tax issues, such as use tax apportionment.
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