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Worker reclassification and payroll taxes, part 1: voluntariness

As humans, we like to think we're free.

But when an action is taken under pressure, is it still in some sense "voluntary," as long as the person made the choice to do it?

Such philosophical chestnuts come to mind in the context of this tax blog because the IRS seems to like to label revenue-generating tax crackdowns with the word "voluntary."

In this two-part post, we will discuss how this applies to issues of employee classification for payroll tax purposes.

In recent years, the IRS has developed more than one program aimed at encouraging taxpayers to take "voluntary" actions in order to avoid unpleasant consequences.

One high-profile example of this is disclosure of previously undisclosed offshore accounts. In return for voluntary disclosure, taxpayers are supposed to be offered certain assurances that they will not have to face tax evasion charges.

Here at home, the word "voluntary" has also cropped up in a key program containing carrots and sticks aimed at facilitating the reclassification of workers from non-employee to employee status.

The program is called the Voluntary Classification Settlement Program (VCSP). It is aimed at employers who have classified various workers as independent contractors or some other non-employee status, but have come under IRS scrutiny for doing so.

In today's economy, there are many economic drivers pointing employers toward using more contractors, consultants and other assorted freelancers. After all, many workers these days actually prefer the flexibility that comes from such free-agent arrangements.

Companies, too, benefit from this flexibility. But the IRS has shown it is determined to track down supposed misclassification of workers by employers who may be trying to evade employment taxes.

In part two of this post, we will discuss eligibility requirements for the VCSP program.

Source: IRS.gov, "Voluntary Classification Settlement Program (VCSP) Frequently Asked Questions," Accessed March 5, 2014

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