One of the many burdens employers face is payroll and payroll taxes. Some employers try to avoid the hassle and expense of paying payroll taxes by treating their “employees” as Independent Contractors. Or, they are not informed of the regulations on how to properly classify workers. Unfortunately, in most cases, workers are mis-classified; and the penalties for this oversight can drive a business into bankruptcy.
The fact that an “employee” works for multiple employers, or works only part-time or on commission does not classify them as an Independent Contractor. If the IRS or EDD determines that the “employee” was mis-classified, the employer is responsible for all of the payroll taxes that should have been paid along with the harsh penalties for non-compliance.
The EDD has many ways to find mis-classified employees. The easiest is when an “employee” files for unemployment. Therefore, if and employer is going to pay an Independent Contractor, it is best to consult and expert to make sure the worker meets all the requirements and that he/she is truly an Independent Contractor.
Since this has been a widespread problem, the IRS has launched a new program called the Voluntary Classification Settlement Program (VCSP) which will allow employers to come clean and properly classify their workers going forward. In order to be eligible for the program, the employer must meet the following criteria:
- Consistently treated the workers in the past as nonemployees,
- Filed all required Forms 1099 for the workers for the previous three years
- Not currently 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, at least 60 days before they want to begin treating the workers as employees.
According to the IRS, employers accepted into the program will pay an amount equaling just over one percent of the wages paid to the reclassified workers for the past year. This is much less than having to pay both sides of the FICA, and all the Unemployment taxes which can add up to well over 18.5%. No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years. Participating
employers will, for the first three years under the program, be subject to a special six-year statute of limitations, rather than the usual three years that generally applies to payroll taxes.