Anita Bartels, the IRS' senior program analyst for employment tax policy, appeared at the American Payroll Association’s 30th Annual Congress, held this year in Orlando, Fla., to report on some major initiatives and to clarify others. Here’s the rundown on three hot payroll issues.
Voluntary Classification Settlement Program
Under the Voluntary Classification Settlement Program (VCSP), which the IRS initiated last fall, you can change workers’ status from independent contractors to employees for future tax periods on favorable tax terms.
According to Bartels, the IRS is very pleased with VCSP’s progress. As of April 30, employers had filed 508 applications, 400 of which were accepted, with 23 rejected. The remainder are in processing.
A rejected application isn’t an open door to a worker classification audit, she stressed.
To participate in VCSP, employers must sign a closing agreement, which Bartels compared to a contract. The IRS will monitor the agreements and visit noncompliant employers, she warned. She reiterated that VCSP-specific information isn’t stored in the IRS’ general tax data system, so employers needn’t fear it will be shared with other federal and state government agencies.
• PICK YOUR TAX PERIOD CAREFULLY: Worker reclassification under VCSP is for future tax periods, which, for payroll purposes, is usually the calendar quarter. However, a common audit trigger is providing a worker with both Forms 1099-MISC and W-2 for the same calendar year.
The lesson: Reclassify your workers beginning in January.
VOW to Hire Heroes Act
The 2011 VOW to Hire Heroes Act adds a new class of veterans to the Work Opportunity Tax Credit (WOTC) and, for the first, time, allows tax-exempt employers that hire eligible vets to claim the WOTC. For tax-exempt employers, Bartels said, the tax credit is limited to the amount of the employer’s share of reported and paid Social Security taxes.
To claim the credit, tax-exempt employers should file Form 5884-C after filing Form 941, she added.
Bartels cautioned tax-exempt employers taking the credit not to reduce tax deposits to account for the credit. She also noted that it doesn’t apply to the employer’s portion of Medicare.
S corporation officers’ compensation
Bartels talked about this topic at last year’s APA Congress and revisited it again this year. The issue, Bartels reminded the audience, is whether S corp shareholder-employees receive a reasonable salary. Those individuals often receive weekly payments called loans to shareholders. The payments aren’t fooling anyone, she said. Field auditors review this issue regularly, she noted, adding that S corps that don’t report salary expenses on their Forms 1120S become audit targets.