IRS offers employee misclassification ‘amnesty’

Under an “amnesty” program announced this week by the IRS, employers may reclassify independent contractors as employees and limit the resulting federal payroll taxes for their most recent tax year, plus avoid related penalties and interest for prior years.

The IRS outlined its new Voluntary Classification Settlement Program (VCSP), which allows eligible taxpayers to voluntarily enter into an agreement with the IRS. Participation is open only to employers that are not currently under audit by the IRS, the U.S. Department of Labor or any state agency for worker misclassification.

Generally, if an employer has the right to direct and control how a worker performs services for the employer, that worker is properly classified as an employee and the employer must withhold FICA and income taxes from wages and pay the employer’s share of FICA tax.

Proper classification of workers has been a perennial concern for employers, employees and the government.

To get a handle on the issue, the IRS last year sent thousands of audit letters to employers. Additionally, the IRS and the U.S. Department of Labor recently agreed to share information to reduce misclassification.

To participate in the VCSP, employers must submit an application and agree to prospectively treat workers or groups of workers as employees for federal employment tax purposes in the future, among other measures.

In return, employers will pay 10% of the employment tax liability otherwise due for the most recent tax year, which will not be subject to interest or penalties. In addition, the IRS will not conduct an employment tax audit with respect to the employer’s worker classification for prior years.

Visit the IRS web site for further details about how to participate in the VCSP.

If you would like help with employee classification or other employment issues, please contact Carol Magyar, CPA, MST, or give us a call at 617.696-8900.