by Brian Mahany
Could this be the sign of a new, kinder and gentler IRS or is Uncle Sam really getting desperate for cash? I am not sure but just 2 weeks after the offshore tax amnesty ended, the IRS yesterday announced a new amnesty program for businesses that have been treating employees as independent contractors to avoid taxes, unemployment, workers compensation and benefits. The new program is called the Voluntary Worker Classification Settlement Program.
[Yes, there is a new acronym, AccountingToday has already dubbed the one-day old program “VCSP”. And yes, there are new forms, too.]
Businesses that participate in the new program can avoid huge penalties. Under the rules, an employer who elects to reclassify workers as employees can virtually avoid all back taxes and penalties. Here is how it works:
Employers that enter the program must agree to prospectively treat the disputed workers as employees. In return, the employer will only pay 10 percent of the employment tax liability for the most recent year. The IRS will waive any interest and penalties on that liability and will agree not to audit past years. The U.S. Department of Labor is participating in the program along with the IRS.
In round numbers, the IRS says that the amount businesses will pay for back taxes for the newly reclassified worker is approximately 1% of their last year’s wage. For a worker earning approximately $30,000 per year, an employer would pay a back tax of $300 and not have to worry about audits, interest and penalties.
As with every tax amnesty program, there is some “fine print.” To qualify, a business must have filed 1099’s for the last 3 years on affected workers. If you were simply paying “under the table”, the VCSP won’t work. The program also isn’t available for businesses under a worker classification audit by the IRS, Department of Labor or state agency.
The IRS is hoping that by waiving penalties and back taxes, more businesses will come forward and add workers to payrolls. Of course, there are many other costs to the business owner including workers compensation, overtime pay laws, family medical leave, benefits, state labor laws, etc. While using independent contractors remains totally legal, businesses that rely on them for on-going work should speak with a tax attorney. The new classification rules are quite complex and worse yet, there is often a difference between IRS, DOL, Social Security and state rules!!!
For more information, contact attorney Brian Mahany at (414) 704-6731 (direct) or by email at Our tax attorneys have helped individuals and small business owners across the United States. All calls are absolutely confidential.
Mahany & Ertl, LLC – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin, Detroit, Michigan, Portland, Maine and San Francisco, California. Services nationwide.