If you’ve been worried that some of your workers may be incorrectly classified as independent contractors, but leery about opening a legal can of worms to fix potential problems, take note: Uncle Sam is raising new threats with one hand … and offering to cut you a break with the other.
Under a new program, the IRS is willing to waive fines and interest penalties for employers that reclassify as employees any workers who are currently misclassified as independent contractors. The partial amnesty is part of the IRS’ new Voluntary Classification Settlement Program (VCSP).
The trade-off: Instead of paying penalties and interest for misclassifying workers, VCSP participants will be liable for just over 1% of the wages paid to those reclassified workers for the past year.
No penalties or interest will be due, and the IRS will back off on audits related to these workers for earlier years.
To learn more about the VCSP and find out if your organization qualifies, go to www.theHRSpecialist.com/VCSP.
Following the money
This new offer is strong incentive because the IRS and U.S. Department of Labor just announced they’ve begun an information-sharing initiative with 10 states to “end the business practice of misclassifying employees.” The agreements should make it easier for both the states and feds to go after companies that misclassify.
States that have signed agreements with the IRS so far—and, thus, where you should intensify your own self-reviews of contractor status—are Connecticut, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, Missouri, Montana, New York, Utah and Washington. More states will likely follow.
“For governments, the bottom line is that when an individual is an employee, it gets more money and it is more easily collected, than when an individual is an independent contractor,” says Michael W. Fox, an attorney at Ogletree Deakins in Austin, Texas. “If you are an adherent of the ‘follow the money’ line of reasoning, that is enough to make you take notice that you should make sure that your independent contractors really are that.”
Other states have launched their own misclassification crackdowns. California just passed new legislation imposing strong financial penalties on willful misclassification.
The IRS estimates that up to 80% of independent contractors are incorrectly classified. They predict their new crackdown initiatives will reap $7 billion in new federal revenue over the next 10 years.