A problem common to employers is how to classify the people who work for them. Certainly, someone who works full time for a particular business owner who controls what he or she does is most probably an “employee.” Someone else who operates on his or her own schedule and provides services to a number of different persons and entities is likely an “independent contractor.” In between those poles is a large gray area where identifying a worker as an employee or independent contractor can be problematic. Make the mistake of misclassifying a worker as an independent contractor when he or she should legally be treated as an employee, and the IRS can seek several years of back withholding taxes, as well as unpaid Social Security (FICA) and Medicare taxes, plus penalties and interest. Minimum wages, overtime, workers compensation, unemployment insurance, medical care coverage and other employee benefits under federal and state law could also enter the mix.
The IRS recently announced a Voluntary Classification Settlement Program. Under this Program, a business owner may agree to reclassify independent contractors as employees. The employer’s reward is that it will have to pay only 10% of the payroll and Social Security taxes due for the most recent tax year and determined at reduced rates, with no interest and penalties. Compare that result with paying all payroll taxes at regular or increased rates accrued over periods of at least three years, plus perhaps other employee benefits, plus interest and penalties. The potential savings offered by the Program warrant the review of every business owner. Employers eligible to participate in this program:
1. must have consistently treated the subject workers as non-employees;
2. must have filed all required Forms 1099 for the previous
three years;
3. cannot be under audit by the IRS;
4. cannot be undergoing a worker classification audit by the Department
of Labor or a state government agency; and
5. must be compliance with any prior classification audits conducted by
the IRS and the Department of Labor.
For further details, please visit the IRS website at irs.gov.
