An IRS official noted that it is a valid business position to classify workers as independent contractors, so long as the business follows the law in making the classification.  Anita Bartels, Program Manager for the IRS’s Employment Tax Compliance Policy section, speaking at the IRS Worker Classification webinar on February 15, 2012 , reiterated that classification is usually based on the common-law test that examines whether the employer can control both the work that the worker performs and the method of doing the work.

Ms. Bartels mentioned that employers who want certainty with respect to whether an individual is an independent contractor or employee can file a Form SS-8 “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding” to obtain a determination from the IRS.  It takes about 6 months to receive a response to an SS-8 filing.  She also encouraged employers to consider the IRS’s Voluntary Classification Settlement Program (VCSP) announced in September.  Employers who enter VCSP agree to treat their workers as employees prospectively and settle past years’ liability for employment tax misclassification by making a minimal payment covering past payroll tax obligations.  Bartels stated that as of early January, the IRS had received 217 applications from employers wanting to reclassify workers as employees under VCSP, a number she said is generally in line with expectations.

Takeaway:

Although VCSP can be helpful with respect to federal taxes, there are many issues not covered by VCSP such as a company’s labor, unemployment, workers compensation, and employee benefit concerns, as well as state revenue and labor issues, that may be complicated by the company’s entry into the VCSP program.  Therefore, a thorough analysis should be undertaken and alternatives explored before enrolling in VCSP.