Is Your Company Properly Classifying its Workforce?
As the end of the year quickly approaches, it may be time to sit down and evaluate the classification of your company’s workers. If you determine a certain class or classes of workers may be misclassified as independent contractors, a review of the Internal Revenue Service’s Voluntary Classification Settlement Program (VCSP) may be in order. The VCSP provides taxpayers with an opportunity to reclassify workers as employees for employment tax purposes for future tax periods with partial relief from federal employment taxes. To be eligible to participate in the VCSP, a taxpayer generally must: (1) want to voluntarily reclassify certain workers as employees for future tax periods; (2) be presently treating the workers as nonemployees; (3) have filed all required Forms 1099 for the class or classes of workers to be reclassified for the three preceding calendar years ending before the date Form 8952, Application for Voluntary Classification Settlement Program, is filed; (4) have consistently treated the workers as nonemployees; (5) have no current dispute with the IRS regarding worker classification; (6) not be under employment tax examination by IRS; (7) not be under examination by the Department of Labor or any state agency concerning proper classification of the class or classes of workers; and (9) not have been previously audited by the IRS or the DOL for worker classification (or, if previously audited, have complied with the results of the audit and not currently contesting the classification in court). To participate in the VCSP, a taxpayer must file Form 8952 at least 60 days prior to the date the taxpayer wants to begin treating the class or classes of workers as employees. Finally, a taxpayer participating in the VCSP must agree to prospectively treat the class or classes of workers as employees for future tax periods. In exchange, the taxpayer will: (1) pay 10% of the employment tax liability that would have been due on compensation paid to the worker for the most recent tax year [determined under reduced rates of Section 3509(a) of the IRC]; (2) not be liable for any interest and penalties on said amount; and (3) not be subject to an employment tax audit with respect to the worker classification of the workers being reclassified under the VCSP for prior years. As the VCSP presents a solution for employers faced with worker misclassification issues, again, it is important to evaluate this voluntary program as part of your company’s year-end review.