Thursday, September 29, 2011

IRS Announces “Voluntary Worker Classification Settlement Program”

IRS Announces “Voluntary Worker Classification Settlement Program”
Distinguishing an “employee” from an “independent contractor” can be an involved and ultimately unsatisfying task.  The IRS uses a test utilizing fourteen factors (unweighted between the factors) in making its assessment, but without explaining the number of factors that do or do not drive the ultimate determination.  The IRS’ prejudice is in favor of classification as an employee versus an independent contractor – employee withholding each pay period and a W-2 are preferred to (maybe) quarterly estimated payments and a Form 1099.
The consequences of a classification audit can be drastic.  In addition to liability for unpaid trust fund (FICA, FUTA) taxes, interest and penalties, the company may find itself out of compliance on 401(K) and other retirement savings and as well health insurance plans and statutes dependent on application to the number of employees such as COBRA or the FMLA.
The IRS has announced a program for the companies to reclassify independent contractors as employees.  The program is restricted to companies that have consistently treated the workers as independent contractors, all Forms 1099 have been properly filed for the last 3 years and the company not be currently under a classification audit.  See Announcement 2011-64.  The toll charge for relief from these retrospective penalties is a penalty of 10% of the trust fund taxes (employer and employee side) for the last year and a statue of limitations extension from 3 years to 6.
Companies with independent contractors whose classification is debatable (and few of them are not) may want to assess whether moving them to employee status under this program is advantageous.

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