Determining a worker's classification as an employee versus an independent contractor is more complex than you might suspect. Recently Michael D. Koppel, Tax Advisor at Gray, Gray & Gray, shed light on this all-important topic in an article titled "IRS Cracking Down on Employee vs. Contractor Classification". Koppel writes "If your company hires independent contractors in any capacity, be prepared to prove their independence, or you may face fines, penalties, and back taxes."
According to the IRS website, the Voluntary Classification Settlement Program (VCSP) gives taxpayers an opportunity to voluntarily reclassify their workers as employees (as opposed to independent contractors) for employment tax purposes for future tax periods with partial relief from federal employment taxes. What does this really mean for employers? The employer could potentially have less liability for past payroll tax obligations and enjoy peace of mind from being in tax compliance, plus minimize their tax and administrative duties associated with misclassified workers.
The IRS has announced a modified VCSP that temporarily expands eligibility through June 30, 2013 and allows employers under IRS audit (except employment tax audit) to participate. The modified VCSP (VCSP TEE) is available to taxpayers who would otherwise be eligible for the current VCSP, but who have not filed all required Forms 1099 for the previous three years with respect to the workers to be reclassified. Payment due under the VCSP TEE is higher than the payment under the VCSP, but the benefits are otherwise the same for taxpayers who participate.
If you're an employer contemplating reclassifying workers, remember there can be rewards as well as risks involved. We encourage you to consult with your legal and accounting professionals on this matter.
For more information about VCSP and VCSP TEE, please click here.
If you have any questions about the temporary eligibility expansion or other tax issues, please feel free to contact Gray, Gray & Gray's Tax Department at (781) 407-0300.
