IRS to Help Employers When Reclassifying Employees

First Quarter 2012Newsletters California Update

One of the hot topics these days is proper classification of workers as employees or independent contractors. Getting it wrong can result in audits, penalties, individual lawsuits and potentially class action litigation. In the face of such daunting exposure and possible liability, it is more important than ever to reassess your particular situation and get it right.

In an unusual move, the IRS has thrown a proverbial bone to employers through the Voluntary Classification Settlement Program. Under that program, qualified employers wishing to reclassify workers previously identified as independent contractors as employees, can do so with a dramatically reduced liability exposure.

Proper classification is primarily centered around your relationship with the individual being paid. Although the IRS uses a 20-point test, behavioral control and financial control are generally the biggest factors used to consider the correct classification. The more control exercised by the employer, the more likely the individual is an employee.

Under this new program, employers can settle tax liabilities with significantly fewer penalties and audit protection for prior years. In exchange, the employer must agree to treat those workers as employees on a prospective basis. There are a few additional rules and restrictions, but if you have been consistent in how you handled these folks in the past, and are considering a switch, we can help you work through those. There may not be a better time to do so.