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IRS Announces Amnesty Program For Independent Contractor Misclassification

Posted by Attorney David McClurg in Business Management / Comments

The IRS recently announced a new program which will allow businesses to voluntarily reclassify independent contractors as “employees” for federal employment tax purposes.  Employers participating in this Voluntary Classification Settlement Program (“VCSP”):

1.         Will have to pay only 10% of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year (about 1% of the wages paid to the classified workers for the past year);

2.         Will not be liable for any interest or penalties on that employment tax liability; and

3.         Will not be subject to an employment tax audit with respect to worker classification of the workers in question for prior years.

The program applies to tax payers who are currently treating their workers as independent contractors and who have filed all required 1099 Forms for those workers for the prior three (3) years. This program is not available to companies that are currently under audit by the IRS or a state governmental agency, though the IRS does offer a somewhat similar classification settlement program for tax payers that are being audited. Companies wishing to participate in the program must submit an application to the IRS at least sixty (60) days before they wish to begin treating the workers as employees.

Participation in the program is voluntary, but not without risk.  If a company is participating in the program it must agree to increase the limitation period on assessment of employment taxes from three (3) to six (6) years in connection with the first three (3) calendar years after the date on which a company has agreed to begin treating workers as employees.

More significantly, the IRS and the Department of Labor (“DOL”) have entered into a memorandum of understanding under which they have agreed to share information regarding worker misclassification.  Further, workers that are reclassified under the program will be alerted to potential past misclassification.  This will expose employer’s participating in the program to potential claims under the Fair Labor Standards Act by both the previously misclassified employees and the DOL, including claims for under payment of overtime compensation.

Thus, even though the VCSP may significantly reduce exposure that some employers might have to tax assessments and penalties should they be audited by the IRS, it would appear to increase the employer’s exposure to claims under the Fair Labor Standards Act.

If you have any questions about the VCSP please contact David A McClurg at 414-223-6956.