Business Management Blog


Posts about business management to help you succeed
Business Management

Reclassifying Independent Contract Workers As Employees?

Jan 27, 2012

Posted by Keith Hall - Are the workers in your business Independent Contractors or are they really Employees, instead?  For most of us it is easier to simply call them independent contractors instead of employees because the presumption is that the paperwork is easier.  No withholding, no payroll taxes, less hassles. 

The problem is that the classification of your workers is not a matter of choice.  You can’t just choose for them to be independent contractors because it is easier.  Your worker’s classification is determined by the underlying facts and circumstances of the working relationship with the key point being who controls the work product.  Who tells the worker when to be at work, how to do the work, who provides the tools to accomplish the work, etc?  This has been a point of contention with the IRS for years, and they seem to be increasing their efforts to find those of us who have not been making the appropriate classification.  If you have inappropriately classified employees as independent contractors and therefore failed to withhold and pay applicable taxes the IRS is most likely looking for you. 

But there is good news.  The IRS has developed The Voluntary Classification Settlement Program (VCSP) in order to provide an opportunity for taxpayers to reclassify their workers as employees for employment tax purposes for future tax periods.  For those of us who weren’t aware of the rules, this is a great chance to get things right, and most likely avoid penalties and interest that might otherwise be due.  The VCSP is available for taxpayers who want to voluntarily change the prospective classification of their workers.  The program applies to taxpayers who are currently treating their workers (or a class or group of workers) as independent contractors or other nonemployees and want to prospectively treat the workers as employees.

Advantages:

Taxpayers file an application (Form 8952) to start the process. With acceptance, businesses pay just 10% of the tax computed on favorable rates. There are no penalties or interest for misfiling for past years. There is also audit protection for past years on workers being reclassified.  The most confusing part of this issue is exactly who is an independent contractor and how far back can the IRS go if you have made an error.  The VCSP, according to the IRS, removes the uncertainty for Federal Employment Tax purposes and potentially limits the exposure from previous years.

 

Easy Process:

Business owners should complete Form 8952, Application for Voluntary Classification Settlement Program, and file 60 days prior to treating workers as employees. At that point, the IRS will review the application and, if eligible, a closing agreement will be prepared by the IRS. Business owners should send payment after the closing agreement is received.

 

Eligible businesses:

- Must be currently treating workers as nonemployers

- Must have filed 1099s for nonemployees

- Cannot be under audit

- Can be tax-exempt organizations or government entities

- Agree to extend the Statute of Limitations

If you are not sure or you know that you have made an incorrect classification, the VCSP may be a good thing for you.  Have questions? NASE Members can refer questions to our CPAs and small business tax professionals here.

Share This Page...

Related News...

    5 Tips for Creating a Business Continuity Plan for your Small Business

  • When you are operating a business there is nothing as bad as a missed opportunity. Any unexpected event whether manmade or natural can greatly disrupt your business. To avoid such problems it’s very important to create a business continuity plan. A good business continuity plan will help you reduce the loss and downtime in case there is a disruption. It will also help boost your employee and customer confidence and ensure that your business is back on track. Read through to learn some of the tips that can help you.
    Posted on May 04, 2018
  • Transitioning From Employee To Business Owner

  • When the frustration of the daily grind or the thoughts that “I could do this and be my own boss” start to cross your mind, then it is time to sit down and plan how to get from the “here” of a job to the “there” of starting your own business.
    Posted on Apr 01, 2013
  • Look Before You Leap: Researching the Market Before You Start a Business

  • Somewhere between that “ah-ha” moment of a great business idea and cashing your first paycheck should be a lot of research to determine what the market is like for your idea. Many entrepreneurs are very good at coming up with services or products that sound like they fill a need, but fall short in how to enter the market. Often they will blindly jump into the business arena, only to find that they either failed to do any market research or grossly misunderstood the market.
    Posted on Mar 07, 2013
Want to see more news items? Click here  

Related Videos...

  • NASE Benefits At A Glance

    As a NASE member you have access to MANY benefits designed to help you with your business needs. In this video John Hearrell talks about how to quickly see just what is available to you.
    Posted on Mar 28, 2018 by John K. Hearrell
  • How to Deduct the Business Use of Your Vehicle

    Will you be prepared at the end of the year to take your vehicle tax deduction? Are you keeping a mileage log in case of audit?
    Posted on Jan 10, 2018
  • NASE Business Benefit Overview

    Through your NASE membership, you will unlock countless doors that lead directly to one goal: Providing you the tools and resources needed to have a true business advantage in the marketplace.
    Posted on Jan 10, 2018
Want to see more related videos?  Click here 

Still Have Questions?

Ask The Expert