IRS Announces Independent Contractor Settlement Program

November 29, 2011

Employers often misclassify employees as independent contractors thus avoiding payroll taxes and other compliance requirements. This issue has come under increased scrutiny from the Internal Revenue Service (IRS), and the consequences of misclassification are serious.

If an employer is found to have misclassified workers as independent contractors, the employer can be assessed for income taxes that were not withheld, unemployment taxes (FUTA), and both the employee and employer's share of FICA.

The IRS is now making available to employers a sort of amnesty program. This new program will enable many employers to resolve past worker classification issues and achieve certainty under the tax law at a low cost by voluntarily reclassifying workers. The program will allow employers the opportunity to get into compliance by making a minimal payment covering past payroll tax obligations rather than waiting for an IRS audit. This is part of a larger "Fresh Start" initiative at the IRS to help taxpayers and businesses address their tax responsibilities.

The new Voluntary Classification Settlement Program (VCSP) is designed to increase tax compliance and reduce the burden for employers by providing greater certainty for employers, workers, and the government. Under the program, eligible employers can obtain substantial relief from federal payroll taxes they may have owed for the past, if they prospectively treat workers as employees. The VCSP is available to many businesses, tax-exempt organizations, and government entities that currently erroneously treat their workers or a class or group of workers as nonemployees or independent contractors, and now want to correctly treat these workers as employees.

To be eligible, an employer must:

- Consistently have treated the workers in the past as nonemployees, contractors

- Have filed all required Forms 1099 for the workers for the previous three years, and

-Not currently be under audit by the IRS, the Department of Labor, or a state agency concerning the classification of these workers.

Interested employers can apply for the program by filing Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before they want to begin treating the workers as employees.

Should you use Independent Contractors and question whether or not the relationship is compliant, contact SESCO BEFORE you enter into the above mentioned settlement arrangement to determine if you're in compliance and or have financial liability. Contact us at sesco@sescomgt.com or by phone at 423-764-4127.