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Worker classification: carrots and sticks in IRS amnesty program

In our Feb. 28 post, we discussed plans by the IRS to expand its Voluntary Classification Settlement Program (VCSP). As this expansion moves forward, it is time to look at it in more detail.

Employers in Texas and across the country are affected. Indeed, about 1,000 employers have already used the program to voluntarily convert the work status of contractors to employees.

The determination of whether a particular worker is an employee for tax purposes is not always black and white. In fact, it sometimes seems to involve shades of gray. The IRS uses multiple factors to determine where to draw the line. These factors include the duration of employment, ability to exercise control over the work, and many more.

As difficult as it can be to draw the line between employees and non-employees, the consequences for misclassifying workers can be stiff. The IRS may not only seek to collect back taxes, but also tax penalties. In cases of deliberate misclassification violations, the agency could claim that the business owner or operator is personally liable.

The threat of these consequences creates a significant incentive for many businesses to consider participating in the amnesty program. But it isn’t only removing the potential enforcement stick that motivates employers. The IRS is also providing financial carrots, in the form of partial payroll tax deductions for businesses who participate in the reclassification program.

Under the amnesty program, the IRS is also now allowing participation by employers who are facing tax audits, unless those audits are employment tax audits.

Please visit our page on worker classification.

Source: "IRS Expands Independent Contractor Amnesty," Blooomberg BNA, 4-11-13

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