Legal Trickery – Eric A. Parzianello

Business Law News from Michigan and Florida

  • About

    Legal Trickery is a blog devoted to business law news, cases and other developments from Michigan and Florida as well as commentary from its author, Eric Parzianello.
  • Eric Parzianello on LinkedIn

  • Follow me on Twitter

  • Disclaimer

    I'm an attorney but you're not my client unless you've retained me in writing. Please do not rely on this blog for legal advice. You can read Legal Trickery's full disclaimer here. The hiring of a lawyer is an important decision that should not be based solely upon advertisements. Before you decide, ask me to send you written information about my qualifications and experience.
  • Advertisements
  • Enter your email address to follow my blog and receive notifications of new posts by e-mail

  • Subscribe

  • Blog Categories

IRS To Crack Down on Improper Use of Independent Contractors But Offers Early Settlement

Posted by Eric Parzianello on September 27, 2011

A prior blog post examined some of the dangers of classifying workers as independent contractors when the Department of Labor may consider them to be employees.  If the DOL concludes that employees have been erroneously classified as independent contractors, then  minimum wage, overtime, penalties and interest may be only a part of a business owner’s problems.   Another looming risk as a result of an erroneous classification is the IRS seeking to recover unpaid federal employment taxes.  The IRS has publicized its intent to be more vigilant about worker misclassification in the future.

However, under a new IRS settlement program, business owners have the opportunity to “come clean” regarding workers who have been previously misclassified as independent contractors.  The Voluntary Classification Settlement Program allows eligible business owners to voluntarily agree to reclassify independent contractors as employees (one of the eligibility requirements is that the taxpayer is not currently being audited).  The business owners would then pay only 10% of the payroll tax liability which would have been due on the employee’s compensation for the past year, without interest or penalties.  Participating taxpayers agree to treat applicable workers as employees for future tax periods and extend the period of limitations on assessment of employment taxes for three years to allow the IRS to monitor future compliance.  In exchange, the IRS agrees to:

  • Accept 10 percent of the employment tax liability that may have been due on amounts paid to the workers for the most recent tax year;
  • Waive all interest and penalties on unpaid amounts; and
  • Not conduct an employment tax audit with respect to worker classification of those workers being reclassified for prior years.

To determine whether to consider participating in this program, a business owner should consult with counsel to analyze whether the workers are independent contractors or employees.  The factors used by the IRS center around degrees of control and independence:

  1. Does the owner control or have the right to control what the worker does and how the worker does the job?
  2. Are the business aspects of the worker’s job, including how the worker is paid and who provides tools for the job, controlled by the owner?
  3. How continuous is the relationship?
  4. Is the work performed a key aspect of the owner’s business?

The IRS says that “there is no ‘magic’ or set number of factors that ‘makes’ the worker an employee or an independent contractor, and no one factor stands alone in making this determination.”  The entire relationship must be considered.

For business owners who want a free analysis, the IRS is more than willing to conduct one through the filing of Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.   Although it may take at least six months, the IRS will review the facts and circumstances and officially determine the status of any workers.  However, in light of the publicized vigilance in the pursuit of unpaid taxes by the IRS for misclassified workers, this particular option may fall into the category of “be careful what you ask for.”


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: