The IRS has a new program to allow you to voluntarily classify workers correctly and, in return, to have "relief" (that's the IRS term) for payroll taxes not paid for these workers in the past. Here's the deal:
Maybe you have incorrectly classified workers as independent contractors instead of employees, and you are worried that if you are audited or you get reported to the IRS you will have to pay payroll taxes (FICA taxes, unemployment tax, and others), and fines and penalties, for all the time these people worked for you.
Now, if you meet certain criteria, the IRS will allow you to correct the mistake and classify the workers as employees. And, you won't have to pay all those back payroll taxes.
To qualify for this Voluntary Classification Settlement Program (VCSP), you must have:
• Consistently have treated the workers in the past as non-employees (that is, as independent contractors),
• Have filed all required Forms 1099 for the workers for the previous three years, and
• Not currently be under audit by the IRS, the Department of Labor or a state agency concerning the classification of these workers.
You will still have some payments to make based on amounts paid to these workers for the past year, but no interest or penalties will be applied, and you will not be audited on payments made to these workers for prior years.
How to apply: Use IRS Form 8952 to apply for the VCSP. The IRS will approve your application, you pay the amounts owed, and then you can re-classify the employees.
There is lots more detail you should know about as you consider whether to apply to this program, so read my new article about the Voluntary Classification Settlement Program. The article contains links to IRS articles about the program.
What I haven't been able to find out is the effect of this program on state employment laws and the risk of an audit for payroll tax violations by a state agency, so you may want to research this question before you apply for this program.
If you aren't sure if your workers should be classified as employees, you can file Form SS-8 to get an IRS determination of worker status.
Disclaimer: The purpose of this article is to present the new program, but every business situation is different and there may be other potential liabilities in making this application or in reclassifying workers that haven't been mentioned yet, so, please, Before you apply for this program, check with your legal advisor.
For more information: IRS IR-2011-95
Related Article:
10 Facts about Independent Contractors