IRS gives businesses a chance to correct worker misclassification

While it's not always easy determining whether an individual is an independent contractor or employee, there's a lot at stake if you get it wrong. An employer, of course, has to withhold income and other taxes, as well as pay unemployment taxes and half of an employee’s Social Security and Medicare taxes. But you don’t have to do any of these things when you hire an independent contractor.

In recent years, however, the Internal Revenue Service (IRS) has stepped up worker classification audits to try to reduce the tax gap caused by the disconnect between what the IRS should be collecting and what it's actually collecting. And now, to help ramp up compliance even further, the IRS has announced a new program to encourage businesses who may be getting the classification wrong to voluntarily reclassify independent contractors as employees.  

The Voluntary Classification Settlement Program (VCSP) was rolled out on September 21, 2011. Eligible employers get a break from the sizable employment tax liability, penalties and interest they would have faced from reclassifying workers, whether voluntarily or due to an audit.

To qualify to participate in the VCSP, you must:

=> have consistently treated the workers as independent contractors and filed all required Forms 1099 for the previous three years

=> agree to extend the statute of limitations by three years for employment tax assessments for the first three years beginning on the date the VCSP closing agreement is signed

=> not currently be under audit by the IRS, the Department of Labor or any state agency regarding worker classification  

Keep in mind, too, that you must apply for the VCSP at least 60 days before the date you plan to reclassify the workers.

For additional insight on the Voluntary Classification Settlement Program, check out the FAQs on the IRS website.

IRS gives businesses a chance to correct worker misclassification

Employee or independent contractor? Proposed bill to target misclassification

Today's post comes from G.Neil's HR News Weekly:

Mistakenly classifying employees as independent contractors not only violates the Fair Labor Standards Act (FLSA), but it also deprives workers of certain rights.

The Payroll Fraud Prevention Act recently introduced in the Senate would take a firm stance against employers who misclassify workers.  The bill would require employers to:

•    Keep records clearly indicating the status of each worker as an employee or non-employee
•    Notify workers of their classification as an employee or non-employee
•    Pay steeper penalties for misclassifying workers and violating their overtime and minimum wage rights

The bill would also provide protections to workers who are fired or otherwise discriminated against for trying to be reclassified as employees. Further, the DOL’s Wage and Hour Division (WHD) will conduct audits on industries that frequently misclassify workers.

In a press release, Ohio Senator Sherrod Brown stated,

“Intentionally treating workers as subcontractors when they really are employees is payroll fraud: it cheats workers, taxpayers and other businesses that play by the rules.”

Need help determining whether a worker is an employee or an independent contractor? Check out easy-to-use software for guidance.

Employee or independent contractor? Proposed bill to target misclassification

Misclassifying employees can be a seriously costly mistake

Incorrectly classifying employees as actual employees or independent contractors is a legal risk that can cost your business millions. The federal government is cracking down on the issue, and many states are pushing to make worker misclassification a crime.

Two businesses learned this lesson the hard way. SOH Distribution Co., Inc. and G & A Snack Distributing, Inc. – subsidiaries of Snyder’s of Hanover, Inc. – misclassified nearly 1,500 delivery drivers as independent contractors rather than full-time employees. The employees took action, resulting in a $10 million court settlement to be distributed among the drivers.

Get expert guidance on properly classifying employees with ComplyWare™ FLSA software, which includes a convenient Classification Wizard and the latest FLSA regulations.

Misclassifying employees can be a seriously costly mistake

Independent contractor vs. employee: Proposed bill would toughen classification standards

In mid-December, 2009, Senator John Kerry introduced a bill in the Senate that focuses on employers misclassifying workers as independent contractors. The bill, called the Taxpayer Responsibility, Accountability, and Consistency Act of 2009 (S.2882), would amend Section 530 of the Revenue Act of 1978.

The “safe harbor provision” of Section 530 gave businesses some leeway in classifying workers as independent contractors for employment-tax reasons. If certain requirements were met and the business had a “reasonable basis,” it could treat an individual as an independent contractor without having to resort to the IRS’ 20-factor common-law test.

But that could change with Kerry’s proposed legislation. Under the Taxpayer Responsibility, Accountability, and Consistency Act, a business would have a “reasonable basis” for classifying a worker as an independent contractor (and not be held to the common-law test) only if it met these two new standards:

1) The employer didn’t treat any worker in a substantially similar position as an employee since December 31, 1977

2) The independent contractor classification was based on a written statement from the Department of Treasury that the worker was not an employee, or on an IRS examination that concluded the worker was not an employee

The bill would also require you to issue a Form 1099 to anyone your business pays more than $600 annually, in addition to giving workers classified as independent contractors the right to obtain a determination of their status from the Secretary of the Treasury.

So what’s your status, Gladys?

If a worker is classified as an employee, you are required to withhold income taxes, and pay Social Security, Medicare and unemployment taxes. With independent contractors, however, you do not have these same obligations.

Yet if you misclassify an employee as an independent contractor, you may pay dearly down the road.

Basically, the questions in the IRS’ common-law test fall under three categories:

1) Behavioral control – Does your business direct or control how a person’s work is done through instructions, training or other means?

2) Financial control – Do you direct or control the business aspects of a person’s job, such as reimbursing expenses or providing supplies?

3) Type of relationship – What is the relationship between your business and the worker, such as written contracts or employee-type benefits like insurance and vacation pay?

In most cases, if your level of control extends to what is done by an individual – as well as how it is done – then that worker is an employee and not an independent contractor. An independent contractor, as a sole proprietor, directs many aspects of the business relationship.

Getting this right is critical – and could become more so under the Taxpayer Responsibility, Accountability, and Consistency Act. Misclassify a worker and you could be looking at a substantial tax bill and penalties from the IRS. There’s also the possibility of a misclassified independent contractor suing you for not providing the necessary overtime, meal periods or rest breaks that an employee would receive.

Independent contractor vs. employee: Proposed bill would toughen classification standards