Tax Break to Clients Who Fix Independent Contractor Misclassification

If you have clients who have been misclassifying W-2 employees as independent contractors (ICs), the IRS is providing a way for them to come clean.

Through the agency's recently launched Voluntary Worker Classification Settlement Program, if employers voluntarily reclassify their ICs as employees, they will only be required to pay a small portion of the back payroll taxes they owe

To be eligible, the employer must:

  • Have consistently treated workers in the past as nonemployees.
  • Have filed 1099s on those workers for the previous three years.
  • Not currently be undergoing an audit by the IRS, Department of Labor, or any state agencies.

Employers can apply for the Voluntary Classification Settlement Program by filling out Form 8952. If accepted, the employer pays the IRS just around 10 percent of the payroll tax liability that should have been due for the past tax year (equal to about one percent of the wages paid to the workers in that year).

But why wouldn't an employer just quietly reclassifying their workers and pay nothing? Well, if they participate in the program, the IRS will not audit them on prior payrolls for those workers.  If the past misclassification was found during an IRS audit, not only would the employer have to pay the entire amount of back taxes due, they would also be subject to penalties and interest. And, according to The Wall Street Journal, the IRS is planning to be even more diligent about investigating worker misclassification going forward.   

You can help make it even easier for clients to fix their misclassification errors by converting their 1099 independent contractors to W-2 employees and outsourcing their employment to a contract staffing back-office, such as Top Echelon Contracting.  That way, your clients can still keep their costs and administrative hassles down, but they can do so legally without the threat of an IRS audit because all the required payroll taxes are paid by the back-office.

Debbie Fledderjohann is the President of Top Echelon Contracting, Inc.

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