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IRS expands program on payroll taxes and worker classification

Worker classification and payroll taxes are invariably a tricky issue for employers. As we discussed in our January 18 post, employers can encounter problems with the IRS when they do not make payroll tax payments in a timely manner.

Such taxes must be paid, however, only for employees. Or, put another way, payroll taxes do not have to be paid for independent contractors, consultants or other non-employees.

Employers in Texas and across the country often struggle, however, to find the right classification for workers. The rules regarding who is an employee and who is not for payroll tax purposes involve the application of many factors. It isn't always easy for employers to make the right call.

Fortunately, the IRS is at last starting to get this. Yesterday the agency announced that it expanding its Voluntary Classification Settlement Program (VCSP). The program is designed to encourage employers to reclassify workers as employees for future tax payments.

The VCSP offers partial reductions in federal payroll taxes for certain employers who have classified a group of workers as non-employees in the past, but now seek to change their status to employees. The workers could have been previously considered contractors or classified using some other non-employee status.

Under the expansion of the VCSP, employers who are facing an IRS audit can still qualify for the program - as long as the audit is not an employment tax audit.

The VCSP, it is worth noting, does not only apply to private businesses. Nonprofit organizations and government entities may also be eligible.

Source: "IRS Expands Voluntary Workers Classification Settlement Program; Relief From Past Payroll Taxes Available to More Employers Who Reclassify Workers as Employees," IRS.gov

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