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Construction Law

IRS Offers Tax Relief for Misclassifying Employees as Independent Contractors

A voluntary program provides a relatively soft landing for construction companies and other high-risk employers

 

This article appeared in the November 2011 issue of "The Construction Advisor" published by Lang & Klain, P.C.


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To avoid employment taxes, workers compensation and other obligations, it is not uncommon for companies in construction and other industries to misclassify as “independent contractors” many workers who should be treated as employees.

That strategy can backfire – painfully – when an audit by the IRS, the Department of Labor’s Wage and Hour Division or other taxing authorities results in an assessment for taxes, penalties and interest.

In an effort to encourage such companies to play by the rules going forward, in September 2011 the IRS implemented the Voluntary Classification Settlement Program. The VCSP provides an opportunity for eligible companies to reclassify their workers as employees for future tax periods, in exchange for 90% relief from their unpaid federal employment taxes. The VCSP was updated in 2012, and a summary of the modifications is available on the IRS website.

See also: Worker Lawsuits a New Threat to Employers in Wage & Hour Claims  •  Piece Work and the Fair Labor Standards Act

Eligibility

To be eligible for the VCSP, a company must meet certain requirements, such as the following:

  • consistently treated the workers as nonemployees;

  • filed all required Forms 1099, for the three previous years, for the workers to be reclassified;

  • not currently under employment tax audit by the IRS; and

  • not currently under audit concerning the classification of the workers by the Department of Labor or by a state government agency.

If the IRS or Labor Department has previously audited a company concerning the classification of the workers, the company will be eligible only if it has complied with the results of that audit.

Benefits

For agreeing to treat a class of workers as employees for future tax periods, the company will:

  • pay 10% of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year;

  • not be liable for any interest and penalties on the unpaid tax liability; and

  • not be subject to an employment tax audit with respect to the worker classification of the workers being reclassified under the VCSP for prior years.

How to Apply

To participate in the VCSP, a company must apply using Form 8952, Application for Voluntary Classification Settlement Program. The application should be filed at least 60 days from the date the company wants to begin treating its workers as employees. The IRS supposedly seeks to make every effort to process Form 8952 with sufficient time to allow for the voluntary reclassification on the requested date.

Along with the application, the company should provide the name of a contact or an authorized representative with a valid Power of Attorney (Form 2848). The IRS will contact the company or authorized representative to complete the process after reviewing the application and verifying the company’s eligibility.

Eligible companies accepted into the VCSP will enter into a closing agreement with the IRS to finalize the terms of the VCSP. Full and complete payment of any amount due under the closing agreement will be due at that time.

Caution

Participating in the VCSP sounds like a good idea, and for many companies it is. However, before entering into an agreement with the IRS or any government agency, it is strong suggested that you consult with your tax or legal advisors to discuss the potential benefits and risks.

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