Important Employer Update: IRS Expands Voluntary Worker Classification Settlement Program
Whenever the topic of a hire comes up, especially a first hire, the conversation tends to go like this:
Organization: By the way, we’re looking into hiring our first (insert position)…sooooo excited.
Me: Fantastic! Have you spoken with someone in HR or someone that does employment law?
Organization: Eh. No. We’re just going to have them be an independent contractor. They can handle all that other stuff on their end.
Me: *blank stare*
In actuality, I launch into my “Now, just so you understand it’s not as simple as that….” speech. But the point is this thought process is had by many an employer, and employee misclassification (the meaning of which I’ve talk about below) is a rampant problem for exempt organizations as well as traditional for-profit businesses. Realizing this, the IRS created the Voluntary Worker Classification Settlement Program to assist organizations with “righting” the “wrong.” But when the program originally came out last year it was tremendously restrictive; which resulted in organizations really needing the help not qualifying. So the program has recently been expanded to allow organizations that couldn’t previously qualify for eligibility (for example, organizations that hadn’t filed a 1099 for mis-classified employees or are under audit) to qualify.
Taking a step back, mis-classification issues tend to come up when employers hire individuals as independent contractors, without applying the appropriate tests. More often than not, many hires (especially first hires) are not independent contractors but employees. And the backlash employers can suffer for “mis-classifiying” (i.e. mis-categorizing) a hire can be significant; primarily because employers are supposed to withhold certain taxes from an employee, assist with paying certain taxes, and employees are supposed to get certain rights that independent contractors don’t get. If classification isn’t done right in the beginning, employers could find themselves responsible for these things retroactively.
What the settlement program does is offer partial relief from federal payroll taxes for eligible employers who are treating their workers (or a class or group of workers) as independent contractors (or some other type of non-employee) and now want to treat them as employees. Employers also only end up paying a small percentage of other federal taxes that were due.
All the press releases and such go heavily into the benefits so I won’t really go into all that here. But as I’ve read about the program there are a few (possible) drawbacks I couldn’t help but wonder about. I wouldn’t say these should automatically deter someone from applying but may warrant serious consideration.
- Are there possible repercussions organizations would have to face with the state? More and more you’re hearing about the reciprocity and information sharing arrangements the IRS is putting into place with state regulators. Knowing this, once the IRS finds out that organizations have been mis-classifying employees, and there are unpaid taxes lingering about, how will that information be treated?
- Organizations that apply are not guaranteed to be accepted; the IRS makes the ultimate decision. The materials say the only thing that the IRS looks for in the screening process is to ensure that eligibility requirements are met. But (skeptical me) what if that isn’t the case? As the old adage goes, you can’t unring a bell. Once the application is submitted if an organization isn’t accepted what happens then?
- What do organizations do about the employees? Once it’s been conceded that those treated as independent contractors were in fact employees will they want to file claims?
- By agreeing to the program, organizations have to agree to an additional three years on the statute of limitations for audits. Will the IRS capitalize on this additional time?
Again, once a cost-benefit analysis is done, the program may be worth it for some. I believe the IRS states there’s been 1000 applications to date; which to me sounds incredibly low. What may be happening is people are waiting the process out to see how it plays out for others. For organizations considering the same approach, note some of the recent expansions are time specific and may not be around for long. Ultimately, if an organization planned on re-classifying employees anyway, this may be a viable option.
More explanation on the program and its expansion can be found on the IRS’ website here. For clarification on eligibility requirements the IRS’ FAQ’s are good. For the skeptics, Forbes had an interesting article with the program originally came out.
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