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.
