In light of the IRS’s fairly recent Voluntary Worker Classification Settlement Program (VCSP) issued in 2012, employers need to consider the benefits and risks of their current classification of employees as independent contractors. This window of opportunity is only available before the IRS or Department of Labor initiates an examination.
Small companies and businesses of many sizes have classified their workers as independent contractors and not employees to gain the following illegal advantages and savings:
These tempting advantages have created a tremendous incentive for employers to classify workers as independent contractors when they are truly employees. The IRS has warned that it is stepping up its policing of this area. Here are some of the costs and penalties employers face if caught by the IRS:
A battle with the IRS is only part of the employer’s problem. Additionally, a disgruntled or vengeful worker can make real trouble for the employer by making the following claims against the employer:
Where the worker seeks reclassification and complains to the authorities, the IRS or the Department of Labor may then get involved by auditing the employer on how it classifies all of its independent contractors. A full-blown audit could result in economic disaster or ruin for an employer.
Bottom Line: Any employer playing fast and loose in this area needs to look at their employment practices very carefully. For determining whether a worker is truly independent please read my article Employee or Independent Contractor? Finally, see Employers Playing Tax Games with Workers: IRS Offers Way to Come Clean for the details and qualification requirements for coming within the IRS’s Voluntary Worker Classification Settlement Program (VCSP).
The key here is to get with your tax attorney to review your situation and take advantage of the VCSP before the IRS comes knocking on your door.
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