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IRS Eases Restrictions on Settlement for Worker Classifications

Through June 30, 2013, employers that did not qualify for settlement under the 2011 Voluntary Worker Classification Settlement Program (VCSP) may be eligible to participate in the "VCSP Temporary Eligibility Expansion" program. Under the 2011 program, employers that did not file 1099s for all workers for the three most recent tax years and employers currently under audit were not eligible to participate in the settlement program. With this temporary expansion of the program, these restrictions no longer apply.

The expanded program requires the employer to file all missing 1099s for the three most recent tax years, pay 25% of the employment tax due for the most recent tax year, pay a reduced penalty for each 1099 that was not filed, accurately classify workers moving forward, and sign a closing agreement with the IRS. If all of these requirements are fulfilled, the IRS will waive all interest, reduce the penalties for missing 1099s, waive 75% of the employment tax due for the most recent tax year, and waive 100% of the employment tax due for the two years previous. Additionally, the IRS will agree not to audit the employer for worker classifications for prior years. Under the 2011 program, employers who have filed 1099s for all workers will only be required to pay 10% of the employment tax due for the most recent tax year, and all interest and penalties are waived.

Participation in either program requires that the employer has consistently treated the worker or other workers in substantially similar positions as a contractor and not an employee and that the employer had a reasonable basis for the classification.

The classification of a worker as either an independent contractor or an employee depends largely upon whether the employer's right to direct and control the worker and employers' attempts to contract around this factor to avoid paying employment taxes often fail. Employers who are currently under audit by the Texas Workforce Commission for the same issue should not hesitate to sign up for the IRS program.

If you have been paying your workers as independent contractors but suspect that they may actually be employees, contact one of our tax attorneys to discuss the IRS's 20-factor test and determine whether this settlement program may be right for you. 

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