Wipfli Alerts & Updates: Workers Being Treated as Independent Contractors

November 9, 2011
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The IRS has been very aggressive in its effort to reclassify independent contractors as employees through exhaustive payroll audits and has often been successful in doing so. Now taxpayers are being provided with a low-cost and administratively efficient opportunity to voluntarily reconsider positions they have taken regarding worker classification.
In an effort to increase tax compliance and certainty for taxpayers, workers, and the government, the IRS has initiated the “Voluntary Classification Settlement” program. The program permits eligible taxpayers to voluntarily reclassify workers, prospectively, as employees for federal employment tax purposes. Eligible taxpayers must apply to the program 60 days before they want to begin treating the workers as employees by filing Form 8952, Application for Voluntary Classification Settlement Program.
To qualify for the program, a taxpayer must:

  • Have consistently treated the workers as nonemployees.
  • Have filed all required Forms 1099 for the workers for the previous three years.
  • Not currently be under IRS audit generally.
  • Not currently be under audit for worker classification issues by the IRS, the Department of Labor, or a state government agency.

The program is available to businesses, tax-exempt organizations, and government entities. The taxpayer need not include all workers in the program but must include all workers of the same class when choosing to reclassify certain workers.
Taxpayers accepted into the program will:

Pay 10% of the employment tax liability that would have been due on compensation paid to the workers for the most recent tax year. This will approximate a cost to the taxpayer of just over 1% of the wages of the reclassified workers for the past year.

  • Not be liable for any interest and  penalties.
  • Not be subject to an employment tax audit of the worker classification of the workers for prior years.
  • Agree to be subject to a special six-year statute of limitations for assessing employment taxes for the first three calendar years under the program.
  • Execute a closing agreement with the IRS to finalize the terms of the program.

If you have any questions, or for more information about this beneficial relief program, please contact Penny Lecheler, Mary Coates, Rick Taylor, or your Wipfli relationship executive with questions or to discuss further.

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