In prior posts, we explained the consequences of incorrectly classifying workers as independent contractors or employees “ a top compliance issue for nonprofit organizations.
At the end of 2012, the IRS introduced a voluntary classification settlement program (Settlement Program) to provide an incentive for employers with misclassified workers to comply. The Settlement Program temporarily relaxes previous requirements and provides additional tax savings for those who qualify.
Expanded Settlement Program
The Settlement Program benefits employers who wish to re-classify contract workers as formal employees.
This program is a temporary, 4 month expansion of an existing worker classification settlement program. Specifically, the it permits employers to participate even if they did have not been filing Form 1099s for the misclassified workers “ a threshold requirement to participate in the existing program. Eligible employers who take advantage of this temporary Settlement Program must agree to:
- Treat workers in the future as employees;
- Pay 25 % (instead of 100 %) of the employment tax liability that would have been due on compensation paid to the misclassified workers for the most recent tax year
- Employers accepted into the program will generally pay an amount effectively equaling just over 1% of the wages paid to the reclassified workers for the past year. No interest or penalties will be due.
- The employer must file a Form 1099 for all misclassified workers for the last three years and provide a copy to the worker.
- The employer must also pay a reduced, graduated penalty based on the number of Form 1099s that the employer failed to file for the previous 3 years, up to a maximum amount determined by the IRS.
- Employers successfully entering this temporary Settlement Program will not be subject to prior year employment tax audits with respect to the affected worker classification(s).
- Employers must reclassify all other workers in the same class as the reclassified workers as employees going forward.
Applying for Relief
To apply for the temporary Settlement Program:
On or before June 30, 2013, an eligible employer must complete and submit Form 8952, Application for Voluntary Classification Settlement Program.
- The application must be accompanied by a worksheet that can be found in Announcement 2012-46. The Form 8952 should be filed at least 60 days before the date the taxpayer wants to begin treating its misclassified workers as employees.
- Applicants for the Settlement Program will also be required to electronically file all unfiled Form 1099 consistent with the nonemployee treatment of the workers being reclassified for the previous 3 years. These late filed Forms 1099 will also have to be provided to the workers being reclassified.
This program has a short window, so if it seems right for your organization, contact a knowledgeable tax attorney or your CPA immediately to begin the process.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. Ellis advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations. Ellis is licensed to practice in Washington and Arizona and advises nonprofits on federal tax and fundraising regulations nationwide. Ellis also advises donors with regard to major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.