On September 21, the IRS announced a voluntary compliance program allowing businesses to reclassify as employees workers treated as independent contractors with minimal tax liability and no interest or penalties on the tax liability.
The voluntary compliance program is open to employers who have consistently treated the workers they are seeking to reclassify as independent contractors in the past, have filed IRS Forms 1099 with respect to those workers for the last three years, and are not currently under audit by the IRS, the U.S. Department of Labor, or a state agency. If an eligible employer agrees to prospectively treat a class of workers as employees, its employment tax liability would be only 10 % of the amount that would have been due if the workers were treated as employees during the most recent tax year, using the reduced rates available under Section 3509 of the Internal Revenue Code.
Under Section 3509, an employer is entitled to pay only approximately 10 %of the total compensation paid to a worker if an adjustment is solely the result of misclassifying a worker. Therefore, this voluntary compliance program allows an employer to settle employment tax liabilities for misclassified workers for slightly more than one percent of the total compensation paid to the workers. The IRS also will agree to waive all interest and penalties on the settled tax liability and will agree not to audit the taxpayer with respect to the classification of the reclassified workers for any prior tax periods.
In exchange for the reduced taxes and interest and penalty waiver, an eligible employer must agree to extend the statute of limitations for assessment of employment taxes by three years for each of the three years following participation in the program.
An eligible employer must submit an application using IRS Form 8952 and provide the name of a contact person or authorized representative. If an eligible employer’s application is accepted by the IRS, the employer must enter into a closing agreement memorializing the terms described above and simultaneously pay the entire settled tax liability.
Whether a worker is performing services as an employee or independent contractor, in many situations, is unclear. In recent years, the IRS has focused on employment taxes with a particular emphasis on worker classification issues as part of an effort to reduce the “tax gap.” This voluntary compliance program offers eligible employers the opportunity to resolve worker classification issues with minimal tax liability.