Do your clients utilize 1099 independent contractors (ICs) who should rightly be W-2 employees? Between government audits and contractor lawsuits, this worker misclassification is becoming an ever more dangerous tightrope to walk. Even so, they may be afraid to set off IRS and U.S. Department of Labor (USDOL) red flags by reclassifying these workers properly, fearing that the fines, back wages and taxes, and other costs owed will outweigh the long-term benefits of going “legit.” The Voluntary Classification Settlement Program (VCSP), which was established in 2011 and expanded in 2013, is a great solution to this problem.
Through the program, employers who voluntarily reclassify ICs as W-2 employees are only required to repay a small portion of the back payroll taxes they owe. This significantly reduces the financial hardships that can keep employers from reclassifying employees correctly.
The employer must meet the following criteria to qualify:
- The workers they want to reclassify must have been consistently treated as non-employees in the past and must be treated as such at the time of application.
- The employer must have filed all required Forms 1099 for the applicable workers for the previous 3 years at the time of application.
- The employer cannot be be under an IRS audit regarding employment taxes (other types of IRS audits are permissible).
- The employer cannot be under USDOL or state agency audits regarding the classification of workers.
- If the IRS or the USDOL has previously audited an employer regarding the classification of the workers, they will be eligible only if they have complied with the results of that audit and are not currently contesting the classification in court.
Employers can apply for the VCSP by filling out Form 8952. If they meet the eligibility requirements, they will receive the following benefits in exchange for agreeing to treat the workers as employees for future tax periods:
- The employer will pay only 10 percent of the employment tax liability that would have been due on worker wages for the most recent tax year.
- The employer will not be liable for any interest and penalties on the amount.
- The employer will 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.
Bottom Line
Whether or not your clients enroll in this formal program to reclassify their ICs, they should conduct an internal audit to ensure that anyone who is classified as an IC meets the IRS guidelines. Another way to help your clients is by offering to convert 1099 ICs to contractors who become W-2 employees of a contract staffing back-office. Also, if you, the recruiter, have been offering contract staffing to your clients by paying the contractors as ICs, you can conduct your own internal audit and consider using a back-office to convert these contractors to W-2 employees.
In both cases, the back-office takes on all the employment responsibilities, including paying the employer portion of taxes, administering and paying the employer portion of benefits (and complying with healthcare reform), payroll processing and funding, Workers’ Compensation, all state and federal tax withholdings, employee issues, and more. That way, the employer or the recruiter will still avoid the administrative hassles and additional costs that come with W-2 employees while removing the risk of an IRS audit.
This article is for informational purposes only and should not be construed as legal advice.
