Whether companies are
properly treating workers as independent contractors rather than as employees
is a frequent area of dispute in a variety of contexts — federal employment
tax, state workers compensation and unemployment tax, wage and hour and other
labor laws (both state and federal) and employee fringe benefits. This is an area that has given rise to
frequent, and often very expensive, litigation.
With respect to worker classification, an Internal
Revenue Service (IRS) investigation may be the most-feared action because a
determination of misclassification may well result in assessment of FICA,
Medicare, FUTA and income tax withholding taxes for a three-year period – a
liability that can be so large for a company whose work force consists largely
of independent contractors that it may well put the company out of
business. In an unexpected move, the IRS
recently launched a new Voluntary Classification Settlement Program (VCSP),
under which employers can prospectively change the status of misclassifed
independent contractors to employees, with dramatically reduced tax liability
for past misclassification.
To be eligible for the
VCSP, an employer must satisfy the following requirements:
(1) In the
past it must have consistently treated all workers in the same class as
(2) It must
have filed all required Forms 1099 for these workers for the past three years;
(3) It must
not currently be under audit by the IRS, the Department of Labor (DOL) or any
state agency concerning worker classification; and
(4) It must change worker classification in
the future for workers in this class to employee status.
A company that was
previously audited by the IRS or the DOL about worker classification may participate
only if it has complied with the audit results.
If the employer
qualifies for participation in the VCSP, it will have the following benefits:
companies that are concerned about their possible exposure for classifying
workers as independent contractors rather than as employees, this may look at
first blush like an unequivocally good deal. Unfortunately, it is not so simple. The potential downsides of participating in the VCSP include the
determining whether to participate in the VCSP, a company needs to carefully weigh
the pros and cons set out above, and all other relevant factors. The relief from liability afforded by the
VCSP may provide companies with a way of escaping from a constantly troubling
situation, freeing them from worrying about a potential IRS audit that could jeopardize
the business. But by doing so, the
company might possibly, as noted above, be increasing its exposure to claims by
the DOL, state authorities and employees that could also have serious consequences.
The contents of this Alert are for informational purposes only, and do not constitute legal advice. If you have any questions about this Alert, please contact a member of the Shulman Rogers Employment and Labor Law Group or the Shulman Rogers attorney with whom you regularly work.
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