Reconsidering Worker Classifications

Tuesday, November 1, 2011
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A new voluntary compliance program announced by the Internal Revenue Service is designed to offer amnesty for employers that have mistakenly classified independent contractors.

The program, however, does not relieve them of all potential tax liabilities, experts say.

By taking advantage of the Voluntary Worker Classification Settlement Program to reclassify independent contractors as employees for federal employment-tax purposes, employers will pay a greater amount of federal employment taxes -- now and in the future.

The program also allows employers to pay a smaller amount of back taxes than they would if the IRS were to find the individuals were misclassified.

Additionally, employers would not be liable for interest or penalties, and would not be subject to an employment-tax audit by the IRS, with respect to worker classifications in prior years.

This initiative by the IRS, which has implemented similar programs in the past, offers employers an opportunity to self-correct past compliance issues, pay a reduced penalty or fine, and take steps to stay in compliance moving forward.

The announcement coincides with efforts at the federal and state levels to more rigorously enforce the proper classification of individuals as employees or independent contractors.

This increased scrutiny, experts say, should play an important role in determining whether individuals within their organizations are correctly classified.

All types of employers are eligible for the program, says Mark Spring, a partner at Carlton DiSante & Freudenberger, an Irvine, Calif.-based labor and employment-law firm. "However," he adds, "I do not believe that the response will be overwhelming, for a variety of reasons."

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The program "only provides relief in one area," Spring says. "The liabilities for improperly classifying workers [are] actually much broader than taxes owed to the IRS," including the failure to pay state payroll taxes and/or make unemployment contributions, for example.

The program also subjects employers to future payroll-tax issues for six years, as opposed to a ordinary three-year statute of limitations.

"I anticipate that many employers may not want to subject themselves to this," Spring says.

Of course, the current economic climate will play a role as well, he adds.

"This is not really a ripe time for [employers] to go to the IRS on something like this, have to pay some money ... [and make changes] which will likely result in increased labor costs," Spring says.

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