IRS Effort Helps Businesses Kick the Contract-Worker Habit

Nervous about hiring in today’s economy? You certainly aren’t alone. Most small business owners I talk with aren’t wiling to add employees as long as the economy remains unstable. Therefore, to fill staffing needs, small firms are turning to temporary or contract employees which provide greater flexibility and less risk. 

The shift toward contract employees is gaining so much traction in in the workplace that some experts predict more than forty percent of the U.S. workforce could be contract workers within the next decade. 

While there are more contract employees than ever before, it can be a tricky question for many small business owners regarding how to classify their employees. From a tax standpoint it is important to properly classify your workers because mistakes can be costly. There are two classifications from which to choose:  "employees" and "independent contractors."

To help small business make the right choice, the Internal Revenue Service offers a list of guidelines on its website.  However, if you think you may have already made a mistake, the IRS is also willing to help.  It’s launching a new initiative to help employers to resolve past worker classification issues by voluntarily reclassifying their workers. The new IRS program will allow employers the opportunity to get into compliance by making a minimal payment covering past payroll tax obligations rather than waiting for an IRS audit.

“This settlement program provides certainty and relief to employers in an important area,” said IRS Commissioner Doug Shulman. “This is part of a wider effort to help taxpayers and businesses to help give them a fresh start with their tax obligations.”

Under the Voluntary Classification Settlement Program (VCSP), eligible employers can obtain substantial relief from federal payroll taxes they may have owed for classifying employees incorrectly as contract workers. The VCSP is available to many businesses, tax-exempt organizations, and even government entities that want to re-classify these contract workers in order to comply with IRS regulations.

To be eligible for the new program an employer must:

• Consistently have treated the workers in the past as independent contractors;
• Have filed all required Form 1099s for the workers for the previous three years;
• Not currently be under audit by the IRS, the Department of Labor, or a state agency concerning the classification of these workers.

Interested employers can apply for the program by filing Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before they want to begin treating the workers as employees.

Employers accepted into the program will pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers for the past year. No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years.  You can lean more on the Employment Tax pages of IRS.gov.