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

New year, new tax forms - Get your updated 2011 W-4s now

It had a bit of a bumpy start in the new year, but the updated Form W-4 is now available.

Here’s what happened: The form released by the Internal Revenue Service (IRS) on January 3 (and published again on January 6) included an incorrect OMB number (located at the top right corner of the form). Soon after our own legal research department detected the error, the IRS released a corrected version of the form on January 7.

As you know, a Form W-4 must be completed by new employees when they begin a job to claim withholding allowances on income tax returns. A new Form W-4 is also required when a current employee’s tax status changes, such as with the birth of a child or a change in marital status.

You can get your updated Form W-4s here. We offer a variety of formats (paper, downloadable, state-specific, multi-pack sets, with imprint) and support materials (tip sheets, an informative W-4 Poster) to meet your business needs and help your employees avoid costly tax mistakes.

New year, new tax forms - Get your updated 2011 W-4s now

The clock is ticking to process the new payroll tax cut for employees

Happy New Year, HR Forum readers! I hope you weathered every HR storm in 2010 with wisdom and finesse - and that 2011 brings you and your business continued growth and success. Check back here often for insight and guidance with the biggest challenges the new year throws our way. It's bound to be an interesting 12 months, with many twists and turns in the worlds of labor law, people management and HR. Together, we can tackle the toughest issues and map out the smartest solutions.

Now for the first topic this year ... taxes!

Thanks to the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, millions of employees will see a bump in their take-home pay this year. That’s because the recently passed Act provides a tax cut that reduces the Social Security (FICA) tax withholding rate from 6.2% to 4.2% of wages paid. For an employee earning up to the $106,800 taxable earnings cap, this 2% reduction amounts to a tax savings of $2,136.

While this is good news for employees, the change is putting employers in a bit of a bind to quickly implement the changes. The IRS is instructing employers to process the new withholding “as soon as possible in 2011 but not later than Jan 31, 2011.” If you accidentally process the payroll tax withholding at the higher 6.2% rate, you must reimburse employees the difference by March 31, 2011.

In addition to the reduced Social Security withholding, the IRS released new income-tax withholding tables for 2011. (The new law maintains the income-tax rates from recent years.)

Because employers and payroll companies must handle the withholding changes, employees won’t be required to take any additional action, such as filling out a new Form W-4

Please note: As soon as it is released by the federal government (usually in January of the new year), we will update the Form W-4 required by every employee to claim (or makes changes to) their tax withholdings.

The clock is ticking to process the new payroll tax cut for employees

Federal agencies to bump up enforcement in 2010

Last year a number of federal agencies increased their compliance enforcement efforts, including the Department of Labor (DOL), Internal Revenue Service (IRS), Equal Employment Opportunity Commission (EEOC), Occupational Safety and Health Administration (OSHA) and Department of Homeland Security (DHS). Recent actions by these agencies suggest that this trend will continue in 2010:

• Designed to raise employee awareness of their rights under the Fair Labor Standards Act (FLSA), the recently launched, DOL-sponsored We Can Help campaign will undoubtedly increase the number of employee wage and hour complaints to the agency. The campaign is actively targeting the country’s lowest-paid workers, regardless of citizenship status, and encourages them to submit information, including pay stubs and hours of work, via the agency’s website. In addition, the DOL received a significant uptick in funding for 2010, and is requesting more in its proposed 2011 budget.

• Immigration enforcement is a priority for the Obama administration, and the DHS is following through with plans to conduct 25,000 on-site inspections at companies who employ workers with H-1B visas – an increase of nearly 20,000 over the previous year.

• Secretary of Labor Hilda Solis has promised more OSHA inspections, and employers can expect to see a shift to a more aggressive, citation-based approach from OSHA. Last year, between July and September, OSHA performed nearly 700 inspections and issued over 1,000 violations that resulted in $1.6 million in fines.

Enforcement efforts like the We Can Help campaign and others underscore the importance of maintaining strict compliance with federal regulations, including those covering labor, safety, tax, immigration and employment law. Stay tuned for more updates as they come.

Federal agencies to bump up enforcement in 2010

IRS answers more pressing COBRA questions

If you’re an employer struggling with COBRA questions, the Internal Revenue Service (IRS) has published added guidance on the federal premium subsidy to help answer some of the most common issues.

The new COBRA regulations, which were part of President Obama’s American Recovery and Reinvestment Act of 2009, contain specific changes to COBRA health benefit requirements that affect former employees, their employers and COBRA coverage providers.

Under the subsidy, involuntarily terminated employees must pay 35 percent of the COBRA premium and employers must front the money for the remaining 65 percent. After paying insurers directly, employers can then claim the payment as an offset against payroll tax liabilities using the updated Form 941.

The IRS published information earlier this year to answer major questions from the public regarding eligibility for the COBRA subsidy. Information has been added to the question-and-answer style document as new questions develop.

Last week, the IRS updated the online document with additional information including guidance on whether an employee who is a reservist would be eligible for the subsidy if called to active duty.

Q. Does an involuntary termination of employment occur if a member of a military Reserve unit or the National Guard who is employed by a civilian employer is called to active duty?

A. Yes. This is the case regardless of whether the civilian employer otherwise treats the employee’s absence as a termination of employment or a leave of absence.

The IRS also added information in response to questions regarding elected officials and employees hired for a limited period of time.

Q. In the case of an employee who is hired only for a limited period, such as a seasonal worker, or a teacher hired only for one school year, can the end of employment at the end of the period be considered an involuntary termination?

A. Yes. Under Notice 2009-27, Q&A-1, an involuntary termination may include the employer’s failure to renew a contract at the time the contract expires, if the employee was willing and able to execute a new contract providing terms and conditions similar to those in the expiring contract and to continue providing the services. Thus, if an employee hired for a limited period works to the end of the period, is willing and able to continue employment, and terminates employment because of the failure of the employer to offer additional work, an involuntary termination occurs for purposes of the premium subsidy.

For more answers to questions on COBRA continuation health coverage read the IRS FAQs for employers.

IRS answers more pressing COBRA questions