Employers who incorrectly classify employees as independent contractors or non-employees are responsible for paying the taxes that were not previously withheld. The Internal Revenue Service may also seek penalties for the unpaid taxes. The IRS just announced a new program that allows qualifying employers the opportunity to get into compliance by making a minimal payment covering past payroll tax obligations rather than waiting for an IRS audit.
To be eligible, an applicant must:
- Consistently have treated the workers in the past as nonemployees,
- Have filed all required Forms 1099 for the workers for the previous three years
- Not currently be under audit by the IRS, the Department of Labor or a state agency concerning the classification of these workers
According to the IRS announcement:
The new Voluntary Classification Settlement Program (VCSP) is designed to increase tax compliance and reduce 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.
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.
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.
You can view the official announcement at the IRS website. Employers interested in taking advantage of the VCSP should speak with counsel familiar with employee/independent contractor issues as well as a tax specialist.Phillip J. Griego & Associates 95 South Market Street, Suite 520 San Jose, CA 95113 South Bay: 408-293-6341 East Bay: 925-364-4655
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