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IRS Voluntary Worker Classification Settlement

The IRS has launched a new compliance program that allows employers to voluntarily reclassify - as employees – workers that they have been erroneously treated as independent contractors.  This new program will allow employers the opportunity to enter into compliance by making a minimal payment covering past payroll tax obligations, rather than waiting for an IRS audit.

Program Eligibility

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

Summary of Program Provisions

Employers accepted into the program will pay a percentage of the federal employment tax liability that may have been due on wages paid to the reclassified workers in the past year. As part of the agreement, participants must agree to treat the workers as employees going forward. Specifically, the company must agree to pay a percentage of otherwise applicable federal employment tax for the prior year. No penalties or interest for that year will be imposed and all other years are deemed closed for employment tax audit purposes. The only other stipulation is that the company must agree to extend the statute of limitations (to six years) for employment tax assessments.

Additional Issues to Consider

Although the reclassification program allows companies to avoid penalties from the IRS, there are other important issues to consider. Changing an independent contractor’s status to employee may entitle them to retroactive benefits, including stock options, FICA taxes and federal unemployment taxes. This is an aspect to the program that many business owners have not previously considered. Equally as important is that the program ONLY applies to federal employment taxes and does not provide any relief on the state level. As a result, it is important to carefully consider whether or not your company should participate in the program. You should consult with a Hayashi & Wayland advisor to determine the best option for your company.

Contact Us

Does your company use independent contractors? Are you unsure if you should participate in the Voluntary Worker Classification Settlement Program? If so, then CONTACT US immediately. Before reclassifying any employees it is absolutely essential to understand the impact it will have on your business. Proper planning will help you to manage any retroactive FICA taxes, benefit claims or state employment tax issue which may arise. For additional information on the IRS Voluntary Classification Settlement Program, please contact Sherrie Isaac, CPA, Partner-in-Charge of General Business Services at 831-759-6300, or click here to email Sherrie. In a brief consultation she can assess your situation and provide guidance on the best steps to take.