New IRS Program Allows Employers to Change Worker Classification; Past Payroll Tax Relief Provided
On September 21, 2011, the IRS announced a new Voluntary Worker Classification Settlement Program that allows a business, not-for-profit or government “employer” to change the classification of its workers from independent contractors to employees. Those “employers” that may have skirted employee classification issues in the past, but have consistently treated workers as independent contractors and filed the appropriate Forms 1099, can apply to prospectively change the worker classification.
Workers may be reclassified by completing Form 8952, Application for Voluntary Classification Settlement Program. The application:
- eliminates the possibility of an audit of the past classification and related payroll taxes for the identified workers or class of workers
- requires payment of only 10% of the applicable payroll taxes that should have been paid for the most recently closed tax year
- specifies that no penalties or interest will be charged.
In comparison, if the worker classification is changed under an audit, then full payroll taxes for up to three years, plus interest and penalties, could be assessed.
To be eligible, an employer must:
- consistently have treated the workers in the past as nonemployees
- have filed the appropriate Forms 1099 for the previous three years (if applicable), and
- not currently be under audit by the IRS, the Department of Labor or a state agency concerning classification of the affected workers.
Form 8952 must be filed at least 60 days before the date the employer wants to begin treating the workers as employees. For example, if the employer wants to treat the workers as employees in the first quarter of 2012, then the application should be filed no later than November 2, 2011.
For those “employers” that have workers or classes of workers that may have been aggressively considered to be independent contractors, this is an opportunity to change the classification at a reduced cost and eliminate the possibility of an audit of past years. Unlike many other IRS voluntary programs, this appears to be a permanent opportunity and does not have an ending date.
For more information, contact your Yeo & Yeo tax professional or visit the IRS website page pertaining to the new program.