Come Clean on Contractor Payroll Taxes Before an IRS Audit

September 23, 2011 | PrimePay Business and Experts Blog | 1 Comment

IRS worker misclassification settlement programOn Wednesday of this week, the Internal Revenue Service (IRS) launched a new program that gives companies which have been misclassifying employees as independent contractors the chance to voluntarily reclassify their workers.  This program offers employers the opportunity to get into compliance by making a small payment to cover past payroll tax obligations rather than waiting for an IRS audit.

“This settlement program provides certainty and relief to employers in an important area,” said IRS Commissioner Doug Shulman.  “This is part of a wider effort to help taxpayers and businesses to help give them a fresh start with their tax obligations.”

Read the IRS News Release:  IRS Announces New Voluntary Worker Classification Settlement Program; Past Payroll Tax Relief Provided to Employers Who Reclassify Their Workers

Several news sources have weighed in on the issue of misclassifying employees.  We’ve included excerpts from three online sources… Bloomberg, The Wall Street Journal and CBS News.

IRS Lets Employers Come Clean on Contractor Payroll Taxes
The Internal Revenue Service is giving companies that have been misclassifying employees as independent contractors a chance to pay a fraction of back taxes to avoid interest, penalties and audits for previous years.

Under the program, U.S. companies would have to agree to treat the workers as employees going forward and pay 10 percent of the previous year’s payroll taxes.  The program is open to employers of all sizes, though Shulman said he is trying to encourage smaller businesses to participate.

Worker misclassification is a complex area of the tax code without clear rules to guide businesses, Shulman said.  Since 1978, Congress has prohibited the IRS from issuing general clarifying regulations.

Read the Full Article from Bloomberg:  IRS Lets Employers Come Clean on Contractor Payroll Taxes

IRS Gives Employers a Break on Payrolls
Businesses that have been improperly labeling their employees as independent contractors got a surprise break Wednesday:  A new Internal Revenue Service program will allow those businesses to reclassify workers and make only a small payment to cover past payroll taxes. 

At issue is whether a worker is deemed an employee or an independent contractor.  The proper classification depends on factors including how much control or direction an employer wields over workers.

The trouble for businesses, however, is that the distinction between the two categories is vague.  The current law is based on a common-law standard involving some 20 factors.

"Despite the IRS's program, the law remains unclear," said Bill Rys, tax counsel of the National Federation of Independent Businesses.  "For some firms there are three different sets of rules defining who is an employee," he said.

Calling a worker an independent contractor instead of an employee can save companies money.  On Monday Labor Secretary Hilda Solis said employers can knock 20% to 30% off their labor costs by classifying employees as independent contractors.

Read the Full Article from The Wall Street Journal:  IRS Gives Employers a Break on Payrolls

IRS Gives Employers Break on Misclassified Workers
The Internal Revenue Service is offering a break to employers who come clean about wrongly classifying workers as independent contractors to avoid paying Federal payroll taxes, the agency announced Wednesday.

What happens when workers are considered independent contractors?  Employers don't have to pay various taxes, including unemployment insurance taxes, workers' compensation premiums or the employer's share of Social Security and Medicare taxes.  Workers also may have fewer rights, including overtime protections.

Employers accepted into a new IRS program must reclassify workers as employees and cough up a bit more than 1 percent of the wages paid to the workers for the past year.  The IRS says no interest or penalties will be due, and employers will not be audited on payroll taxes related to these workers for earlier years.  The program covers only Federal taxes; employers could still be liable for unpaid state taxes.

If businesses don't come forward and are later caught wrongly classifying employees as independent contractors, they could be liable for three years' worth of employment taxes, plus interest and penalties.

Read the Full Article from CBS News:  IRS Gives Employers Break on Misclassified Workers

Tags: employee classifications, payroll tax filing, IRS tax tips & announcements