IRS OFFERS NEW PROGRAM FOR EMPLOYERS TO VOLUNTARILY RECLASSIFY INDEPENDENT CONTRACTORS AS EMPLOYEES

by Rick Dougherty

On September 21, 2011, the Internal Revenue Service (IRS) launched a new program that may provide an opportunity for many employers to resolve past worker classification issues and to achieve certainty under the tax law by voluntarily reclassifying their workers. The new Voluntary Classification Settlement (VCS) program enables employers to make a relatively minimal payment covering past payroll tax obligations related to workers they voluntary reclassify from independent contractors to employees.

The IRS has stated that the goal of the new VCS program is to increase tax compliance and reduce burden for employers by providing greater certainty for all parties involved: employers, workers and the government. Under the VCS program, eligible employers can obtain substantial relief from federal payroll taxes they may have owed for the past if they prospectively treat workers as employees.

Which employers are eligible for this new program?

• Employer must have consistently treated the workers in the past as nonemployees
• Employer must have filed all required Forms 1099 for the workers for the previous three years
• Employer must not currently be under audit by the IRS, the Department of Labor or a state agency concerning the classification of these workers

How does the program work for eligible and interested employers?

• Interested employers can apply for the program by filing IRS Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before they want to begin treating the workers as employees.
• Employers accepted into the program will pay an amount effectively equaling just over 1% of the wages paid to the reclassified workers for the past year. No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years.
• Participating employers will, for the first three years under the program, be subject to a special six-year statute of limitations, rather than the usual three years that generally applies to payroll taxes.

How can an employer determine if a worker is an employee or an independent contractor?
Under the "common law" rules developed by the courts, a worker generally is an employee for federal tax purposes if the employer has the right to control and direct the worker regarding the job he is to do and how he is to do it. While the classification of each worker may be evaluated differently based on specific facts and circumstances, the IRS has generally applied the following factors in determining if an employer has the right to direct and control the worker:

1. A worker who must comply with instructions about when, where, and how he or she is to work is ordinarily an employee.
2. Training a worker by teaming an experienced employee with the worker, by corresponding with the worker, by requiring him or her to attend meetings, or by using other methods, indicates the business wants the services performed in a particular method or manner. Ongoing training is a particularly strong sign of an employer-employee relationship.
3. Integration of the worker's services into the business operations generally shows the worker is subject to direction and control.
4. If the services must be rendered personally, the business probably is interested in the methods used to accomplish the work as well as in the results.
5. A business that hires, supervises, and pays assistants for a worker is exhibiting employer-like control over the worker on the job, while an independent contractor relationship is indicated if a worker is contractually obligated to hire, supervise, and pay assistants.
6. A continuing relationship between the worker and the business indicates an employer-employee relationship exists.
7. The fact that a business requires work to be performed on its premises suggests control over the worker (if the work could be done elsewhere). Work done off the premises, such as at the worker's office, indicates some freedom from control.
8. A business exhibits control over a worker if it requires him or her to perform services in a specific order or sequence.
9. A business's requirement that the worker submit regular or written reports indicates a degree of control over the worker.
10. Payment by the hour, week, or month generally points to an employer-employee relationship, if this method of payment isn't just a convenient way of paying a lump-sum agreed upon as the cost of a job. Payment by the job or on a straight commission basis generally indicates a worker is an independent contractor.
11. A business exhibits characteristics of an employer if it supplies a worker with significant tools, materials, and other equipment, or ordinarily pays the worker's business and/or traveling expenses.
12. A worker exhibits independent contractor status if he or she invests in facilities that aren't typically maintained by employees (e.g., renting an office), while an employee usually relies on the employer to provide facilities needed to do the job.
13. A worker who can realize a profit or suffer a loss as a result of his or her services generally is an independent contractor, but a worker who can't is an employee.
14. A worker who performs more than minimal services for a number of unrelated businesses at the same time generally is an independent contractor.
15. The fact that a worker makes his or her services available to the general public on a regular and consistent basis indicates an independent contractor relationship.
16. The right to fire a worker is a factor indicating that he or she is an employee, while an independent contractor can't be fired as long as he or she produces the work that was contracted-for.

The new VCS program presented by the IRS provides an opportunity for employers to evaluate the classification of workers between employees and independent contractors, as well as the ability for employers to clarify their classification at a relatively low cost. If you have questions regarding how this program may apply to your organization, please do not hesitate to contact Baratz & Associates, P.A.