October 18th, 2011
New IRS amnesty program lets companies reclassify independent contractors as employees with reduced liability for back taxes
Right around the same time the federal government announced a new $46M enforcement effort aimed at ferreting out independent contractors who have been misclassified, the IRS announced a new Voluntary Classification Settlement Program (VCSP) offering protection for employers who voluntarily come forward to reclassify their independent contractors. Companies will pay just 10% of the taxes that would otherwise be due for one year, vs. a three year audit period, with no interest and penalties, and will be exempt from an IRS classification audit for prior years.
While this program is not a complete “get out of jail free” card, the potential reduction in liability that could come with an audit is substantial. For a worker who earned $100,000 for each of three years, an audit could result in over $50,000 in payroll tax liability (including interest and penalties) vs. the approximately $1,000 the company would pay in settlement with this new program.
Is this a trap?
The IRS has stated that since the VSCP is not an audit program, information will not be shared with state agencies, nor will it be used to trigger an audit of the company’s social security accounts. While the IRS was initially vague regarding possible information sharing with the Department of Labor pursuant to their newly announced joint enforcement program, they have recently stated that information will not be shared.
And there is a catch – for the first three years after the amnesty payment, companies agree to extend the window for future payroll audits for an additional three years (i.e., 6 years instead of 3). Companies may also want to consider the risk that reclassification could open the door to private lawsuits from the workers and/or class actions for unpaid overtime or benefits.
Will you qualify?
The program is not for everyone. First, the company must not be under payroll audit by the IRS, state, or Department of Labor. Secondly, the company must have consistently treated the workers as independent contractors, i.e., issued 1099’s for each of the last three years.
Companies considering taking advantage of the VCSP should work with appropriate tax and other professionals to first assess the risk that workers are misclassified, and then whether the facts met the standard to quality for the program. For companies who qualify, the program could bring a level of certainty to an otherwise high level of future risk. On a go-forward basis, it will be even more important for these companies to ensure that they are classifying their workers correctly, to avoid future liability.
Posted in Contingent Workforce Strategies, Employee Classification, Government, IRS, Law, Misclassification, Risk Mitigation, Settlement | No Comments »
September 23rd, 2011
Summary: Last week, the California Legislature passed SB 459, known as the “Worker Misclassification” bill. This bill prohibits the willful misclassification of individuals as independent contractors and imposes penalties of between $5,000 and $25,000 per violation. In addition to these monetary penalties, violators are branded with a “scarlet letter” requiring them to prominently display a notice of the violation on their website, which must remain posted for one year.
Additional Details: What is a “willful” violation? The term “willful” is typically interpreted to require an intentional act or omission, and is defined in the bill as “avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor”. Additionally, the bill provides penalties for employers who make deductions from compensation to misclassified independent contractors that would not be allowed if the individual was an employee (for example, charging for materials, space rental, repairs, etc.).
The Legislature was likely motivated in part by the desire to recapture some of what is estimated to be billions of dollars in lost revenue from the misclassification of employees as independent contractors. Opponents of the bill (the California Chamber of Commerce and other employer-based organizations) call it a “job-killer” and argue that it creates an additional hazard for employers in attempting to navigate the murky waters of classification.
With this new bill, expected to be signed by the Governor in the next 30 days, the potential cost of misclassifying employees as independent contractors ratchets up another few notches — starting at $5,000 to $15,000 per violation and increasing to $10,000 to $25,000 per violation where the employer is found to have engaged in a “pattern or practice of violations”. Therefore, it is more important than ever to for employers to have a classification process in place that they can rely on to establish that they did not “willfully” violate the law.
Advice to employers: This new bill provides yet another indication of both the federal and state government’s intention to look to independent contractor misclassification as a source of revenue. Employers can provide an additional layer of protection from this liability by outsourcing the classification function to a reputable and knowledgeable third party, taking it out of the hands of hiring managers or others who may lack this specialized training and may be viewed as acting in their employer’s economic interests (and not considering the situation through an objective set of eyes).
Posted in 1099 Vs. Employee, Contingent Workforce Strategies, Employee Classification, Government, Independent Contractors, Law, Misclassification | No Comments »
