1099s vs. W-2s? IRS Introduces Amnesty Settlement Program for Businesses That Have Misclassified Workers in the Past.
Many employers have long appreciated the advantages of "alternative" work arrangements with independent contractors, contingent workers, consultants, "freelancers" and temporary staff because these arrangements often produce cost savings and increased flexibility. But beware
The temptation to classify a worker as an independent contractor can be great, considering that employers do not pay unemployment insurance taxes, workers' compensation premiums or the employer's portion of Social Security and Medicare taxes for independent contractors. Also, such workers generally are not eligible for fringe benefits such as insurance and retirement benefits. True independent contractors also are not protected by most employment laws - such as Title VII, the FLSA and ERISA. Hence, these workers often forego overtime wages, pensions and protections from unlawful discrimination.
The problem of employee misclassification is so pervasive - and its impact on federal and state government agencies' tax collections so significant - that the Government Accountability Office (GAO) has estimated that worker misclassification costs the federal treasury alone several billion dollars annually in income tax revenues. Because of this significant loss of revenue, governmental agencies (at all levels) have intensified efforts to "crack down" on the practice of misclassifying workers.
The IRS Rolls Out Its Classification Settlement Program
The IRS announced on September 21, 2011, a new program designed to permit businesses to voluntarily reclassify workers as employees for federal employment tax purposes. Under this new program, instead of paying back taxes, penalties and interest for three years of misclassification, businesses will be able to pay approximately 10 percent of the taxes for the most recent of three years. This Voluntary Classification Settlement Program (VCSP) also will relieve employers from paying interest or penalties on those workers whom they are reclassifying. To participate in the program, the employer must meet the following eligibility requirements:
- Not currently under investigation or audit by IRS, DOL or a state agency concerning the classification of its workers;
- Consistently treated the workers as non-employees; and
- Must have filed all required 1099 forms for the workers for the previous three years.
Participation in the VCSP has no effect on possible state law audits, and resulting violations will likely not preclude a DOL audit in connection with wage-hour issues and will not preclude private actions, such as for overtime under federal or state laws.
Steps to Consider Now
The determination of whether a worker is an independent contractor or an employee can at times be very difficult and may even vary from law to law. In some circumstances the line between the classifications can be blurred, leaving employers open for inadvertent classification mistakes. In this environment, employers would be wise to consider the following practice pointers concerning the classification of workers:
- Evaluate the classification status of workers carefully at the outset of the work relationship to determine whether a worker is an independent contractor or an employee. Concomitantly, if you inherit a large number of independent contractors on your company's 1099 payroll (such as following an acquisition or a merger), be suspicious and inquire when the last time the business conducted a classification audit.
- Become familiar with factors used by the IRS, the DOL and state enforcement agencies for determining independent contractor status. Also, case law applicable to relevant laws, occupations and/or industries may provide helpful guidance (as certain occupations and/or industries have been the subject of repeated litigation).
- Conduct a self-audit of your independent contractors to determine whether any might more properly be classified as employees. Be mindful of the factors used by the IRS (or other federal agencies) and state enforcement agencies when making this determination and understand that it is often not an easy assessment. Understanding the legal "fine points" is often a critical factor in classifying workers properly, although in some cases the "call" is not easy.
- Check your provider agreements with health insurers and/or third-party FMLA administrators to ensure that your business retains exclusive control over determinations regarding "covered employees" under the FMLA.
For more information, go to http://www.irs.gov/newsroom/article/0,,id=177092,00.html
