We have blogged about the correct classification of workers as “independent contractors” or “employees”. There, we also reported on the Department of Labor’s partnership with the IRS and several state governments to crack down on employee misclassification among both for-profit and non-profit employers.
This combined effort has resulted in widespread and aggressive audit activity in this area in Arizona as well as nationally. With this heightened scrutiny, an employer that has misclassified its workers is much more likely to be “found out,” have its workers reclassified, and be required to pay substantial taxes and penalties.
The IRS has announced a new relief program for employers that choose to come forward before they are audited by the IRS. This relief comes in the form of a voluntary program that permits employers to reclassify their workers and avoid being audited on payroll taxes related to misclassified workers for prior years. The program is known as the Voluntary Classification Settlement Program (“Settlement Program”).
Any employer – including a tax-exempt employer – may participate in the Settlement Program so long as it meets the following criteria:
- Workers must have been consistently treated as nonemployees;
- All required Forms 1099 must have been filed for each worker for the past three years; and
- The business is not currently under audit by the IRS, DOL or a state agency concerning the classification of these workers.
Employers who take advantage of the Settlement Program will save a considerable amount of money through voluntary reclassification. Any employer who participates in the program and agrees to prospectively treat the workers in question as employees will only owe 10% of the employment tax liability due on compensation paid to employees for the most recent tax year. In addition, employers who participate in the Settlement Program will not have to go through an audit or complicated administrative procedures.
Relief under the Settlement Program can be requested using Form 8952. Any employer that participates in the Settlement Program will be required to extend the employment tax limitations period from three years to six years for the first three years it participates in the Settlement Program.
Employers should take note, however, that the Settlement Program only resolves federal tax liability and does not resolve other potential liability for misclassified employees that may stem from violations of state tax laws, workers’ compensation laws, ERISA violations, federal or state wage and hour laws, or other employment laws. For this reason, employers are strongly advised to obtain qualified legal advice before applying for relief under the Settlement Program.
Ellis Carter is a nonprofit lawyer licensed to practice in Washington and Arizona. Ellis advises tax-exempt clients on federal tax matters nationwide.