Posts tagged independent contractor

IR-2011-95, Sept. 21, 2011

WASHINGTON – The Internal Revenue Service launched a new program that will enable many employers to resolve past worker classification issues and achieve certainty under the tax law at a low cost by voluntarily reclassifying their workers.

This new program will allow employers the opportunity to get into compliance by making a minimal payment covering past payroll tax obligations rather than waiting for an IRS audit.

This is part of a larger “Fresh Start” initiative at the IRS to help taxpayers and businesses address their tax responsibilities.

“This settlement program provides certainty and relief to employers in an important area,” said IRS Commissioner Doug Shulman. “This is part of a wider effort to help taxpayers and businesses to help give them a fresh start with their tax obligations.”

The new Voluntary Classification Settlement Program (VCSP) is designed to increase tax compliance and reduce burden for employers by providing greater certainty for employers, workers and the government. Under the 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. The VCSP is available to many businesses, tax-exempt organizations and government entities that currently erroneously treat their workers or a class or group of workers as nonemployees or independent contractors, and now want to correctly treat these workers as employees.

To be eligible, an applicant must:

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

Interested employers can apply for the program by filing 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 one percent 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.

Full details, including FAQs, will be available on the Employment Tax pages of IRS.gov, and in Announcement 2011-64.

IRS Summertime Tax Tip 2010-20 http://bit.ly/9jHRSQ 

As a small business owner you may hire people as independent contractors or as employees. There are rules that will help you determine how to classify the people you hire. This will affect how much you pay in taxes, whether you need to withhold from your workers paychecks and what tax documents you need to file.

Here are seven things every business owner should know about hiring people as independent contractors versus hiring them as employees.

1. The IRS uses three characteristics to determine the relationship between businesses and workers:
   • Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.
   • Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.
   • Type of Relationship factor relates to how the workers and the business owner perceive their relationship.
2. If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.
    
3. If you can direct or control only the result of the work done — and not the means and methods of accomplishing the result — then your workers are probably independent contractors.
     
4. Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms. 
5. Workers can avoid higher tax bills and lost benefits if they know their proper status.
    
6. Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.
7. You can learn more about the critical determination of a worker’s status as an Independent Contractor or Employee at IRS.gov by selecting the Small Business link.  Additional resources include IRS Publication 15-A, Employer’s Supplemental Tax Guide, Publication 1779, Independent Contractor or Employee, and Publication 1976, Do You Qualify for Relief under Section 530? These publications and Form SS-8 are available on the IRS website or by calling the IRS at 800-829-3676 (800-TAX-FORM).

Links:

Publication 15-A, Employer’s Supplemental Tax Guide ( PDF )

Publication 1779, Independent Contractor or Employee ( PDF )

Publication 1976, Do You Qualify for Relief under Section 530? ( PDF  ) 

Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding ( PDF )

The new Health Care Act could give the government an additional incentive to make businesses reclassify independent contractors as employees.   State unemployment departments may already be the great enforcers and deciders in this debate.  We at Criser, Gough and Parrish believe that this is an area of concern to our clients. Small businesses need to be aware.

The question of whether an individual is working as an independent contractor or an employee is not a new one. A study in 1996 showed that between 1988 and 1996, 90 percent of court cases challenging independent contractor status resulted in the IRS classifying the workers as employees, not contractors, forcing taxpayers to come up with over $751 million in back taxes and penalties.

Shortly after these findings were released, President Clinton signed the Small Business Job Protection Act so that the burden of proof resided with the IRS, meaning the IRS had to prove that someone was an employee, rather than the employer having to come up with proof that a worker was truly an independent contractor. Business owners at that time could take a few steps to set up an independent contractor properly, such as having a written agreement, denying any fringe benefits and getting the contractor to set up their own business, and they could sleep well at night knowing they were most likely in the clear.

While the question of independent contractor vs. employee hasn’t completely gone away, it hasn’t received much attention since that time. But times have changed. With the federal government and states on the hunt for additional tax revenues to help cover growing deficits, both levels of government are on the lookout for ways to collect more taxes, and this seems to be their latest solution.

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