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Tax Alert: IRS rolls out worker classification program…

Does your business have an independent contractor issue?

There has been significant focus by the IRS and other governmental agencies over the last few years on whether businesses are appropriately characterizing workers as employees or independent contractors.  The IRS has unveiled a new voluntary compliance program to help businesses that have improperly classified their workers as independent contractors.  Under this program, employers who voluntarily change the classification of their workers from independent contractors to employees will essentially not be penalized and will not be subject to audit for prior years.  The terms of this new program are very favorable and should be considered by any business that has an independent contractor whose status as such is questionable.

To qualify for this program, the business must:

  • Be presently treating the workers as non-employees.
  • Have satisfied the Form 1099 reporting requirements for these workers for the three years preceding the year that a request for participation in the program is filed.
  • Not have any current dispute with the IRS as to classification issues, nor be under examination by the IRS, department of labor, or any state agency relating to classification issues.
  • Have complied with the results of any prior examination by the IRS, DOL, or state agency that addressed worker classification issues.

The business must agree to pay 10 percent of the employment tax liability that would have been due on compensation paid to the workers for the most recent tax year, and agree to an extension of the statute of limitations. The business will not be liable for any penalties or interest on this amount and the business will not be subject to an employment tax audit with respect to the classification of the workers for prior years.

In order to apply for this program, a business should complete and file Form 8952 – Application for Voluntary Classification Settlement Program. While there are a number of requirements for qualification, the terms of this offer are favorable. Unlike other “safe harbor” provisions providing relief for employers that have misclassified workers, this program does not require that the business have a “reasonable basis” for treating the worker as an independent contractor.

Given that the classification issue is a high priority with the IRS and other federal and state agencies, employers should carefully evaluate whether to take advantage of this program.

For more information, please contact:

Mark D. Klimek
216.348.5453
mklimek@mcdonaldhopkins.com

David M. Kall
216.348.5812
dkall@mcdonaldhopkins.com

or any of our tax attorneys by clicking on the Tax Practice link below:

Tax Practice

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IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any tax advice contained in this communication (including any attachments), was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding any penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any transaction matter addressed herein.

© 2011 McDonald Hopkins LLC All Rights Reserved. This Alert is designed to provide current information for our clients, friends and their advisors regarding important legal developments. The foregoing discussion is general information rather than specific legal advice. Because it is necessary to apply legal principles to specific facts, always consult your legal advisor before using this discussion as a basis for a specific action.