IRS Offering Employers a Break on Missclassified Independent Contractors

The Internal Revenue Service (IRS) is allowing employers who have misclassified workers as independent contractors to reclassify them as employees in the future at reduced costs.

According to a report from the State Bar of Wisconsin, an employer can prospectively reclassify independent contractors as employees and only pay “limited employment tax liability” for past use of those workers as contractors. It will remain at the discretion of the IRS whether an employer qualifies for this program established under new Voluntary Classification Settlement Program.

If the IRS accepts an employer into the program, the employer will consent to a closing agreement. This “extends the statute of limitations on the assessment of employment taxes for three years” in the future. The report adds, “the employer is protected against prior assessments for the reclassified workers.”

An employer qualifies for the program if they meet three criteria. First, the would-be participant in the program already treats prospective employees as independent contractors and must be willing to treat those prospective employees as such for three years.

That employer must also have filed Form 1099 tax papers on those employees for three years and the form must have been filed within six months of its deadline. Finally, the employer seeking to enter the program must not be under audit from the IRS over the classification of employees.

That issue, the alleged widespread misclassification of employees, was the precipice for the establishment of the program, the Bar report indicates. In September, the tax agency said it was working with the Dept. of Labor on “targeted enforcement efforts against misclassified workers.”

The Wisconsin Bar believes there are several benefits to the program, including reduced costs to employers, an amount “equal to 10 percent of the employment taxes for the reclassified workers that would have been due for the most recent year.” The IRS will reportedly not hassle employers who wish to participate in the program about its decision to previously classify employees as independent contractors.

Additionally, there is no fee to apply for the program, but an employee should expect to be ready to make payments to the IRS if they are accepted into it. The IRS has also indicated it will not share information it gleans through the application process with the Dept. of Labor or with separate state agencies who could use the information for its own investigations. The agency also indicates that being denied from the program will not automatically trigger a federal tax audit and that by applying for the program, the IRS does not assume the employer has been misclassifying employees in the past and that they admit no wrongdoing by applying.

Similarly as there are benefits, the IRS program may be of no benefit and prove to be a costly and largely unnecessary process for employers who have been correctly classifying its workers in the past, including those who use independent contractors for services.

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