by Brian Mahany
Just days ago the U.S. Department of Labor and the IRS announced a new amnesty program called the Voluntary Worker Classification Settlement Program or “VCSP”. Now in several news releases it appears that several states are joining in this massive effort. To date, the states that have joined are Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah, and Washington. Several more states are in the process of joining forces with the Department of Labor as well.
What does this mean for businesses and workers? The government believes that too many people classified as independent contractors should really be employees. For the workers, that means withholding, unemployment insurance and possibly benefits – if available to other workers. For employers, it obviously means increased labor costs.
The entire classification system is extremely confusing to the business community. Often the definition of “employee” versus “contractor” depends on the jurisdiction. It is possible for social security, the IRS, Labor and local authorities to classify the same worker differently! The IRS has classifications for independent contractor, employee, statutory employee and statutory nonemployee.
In general, the tests look at three factors – behavioral, financial and the nature of the relationship. The more control exerted by the employer, the more likely it is the worker is an employee.
Businesses using contractors can either seek guidance from the IRS, a CPA or tax attorney or elect to participate in the current VCSP tax amnesty. The latter requires the business to treat the workers as employees going forward yet avoid audits for back years, penalties and interest. If a worker truly is mischaracterized, its a great deal for the business owner.
Regulators are saying the new measure are not anti-business but by all measures, labor costs will increase. Some states, including Connecticut, have passed legislation criminalizing misclassification by saying that “knowingly” misrepresenting workers as contractors to avoid workers compensation premiums is a felony.
Businesses that make heavy use of independent contractors include trucking companies, construction trades, financial services (brokerage firms) and agricultural businesses. Regardless of your business type, now is the time to reexamine how your workforce is structured and speak to a tax lawyer if there are any questions. The stakes are getting higher as is the risk of getting caught.
The tax lawyers at Mahany & Ertl, LLC have helped taxpayers throughout the United States with a wide range of tax problems including workers classification. Recently we overturned a $4 million dollar audit based on classification of agricultural workers. For more information, contact attorney Brian Mahany at (414) 704-6731 (direct) or by email at All inquiries are strictly confidential.
Mahany & Ertl, LLC – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine & San Francisco, California. Services nationwide.