Companies guilty of improperly classifying employees as independent contractors have just been given a big break — or have they?

The Internal Revenue Service (IRS) has launched a “Fresh Start” initiative to help businesses clear up their tax problems associated with employee misclassification.

Part of Fresh Start is the IRS’ new Voluntary Classification Settlement Program (VCSP). It will allow employers to resolve past worker classification issues — while potentially saving them a ton in back payroll taxes.

Under the program, employers that have misclassified employees as independent contractors can reclassify those workers as employees and only pay a little more than 1% of the wages paid to those workers over the past year to settle their tax obligations.

The IRS says no other interest or penalties will be charged — and no audits will be performed on reclassified workers previous years’ payroll taxes.

Potential concerns

While all of this sounds great, it begs the question: Is there a catch?

Two concerns employers are likely to have that the IRS didn’t address in its announcement of the VCSP:

• Whether participation in the VCSP will lead the IRS to share info about a company’s worker classification practices with the Department of Labor (DOL) and state labor agencies under the new information-sharing agreements announced recently.
  The close proximity in the launch of both programs could smell fishy to employers. While the IRS says VCSP participants’ past payroll taxes won’t be audited, no mention is given as to whether employers are exempted from other agencies’ audits or just those by the IRS.
• Will the VCSP protect employers from private (and potential class-action) lawsuits from workers claiming to have been misclassified — and thus denied overtime pay and benefits? After all, reclassifying workers could be considered an admission of past wrongdoings.

Eligibility requirements

To be eligible for the VCSP, applicants must:

• Have treated the reclassified workers as non-employees in the past
• Have filed all required 1099s for the workers for the previous three years
• Not be under audit by the IRS
• Not be under audit by the DOL or a state agency concerning the classification of the workers in question, and
• File Form 8952 at least 60 days before they want to begin treating the workers as employees.

Info: To ensure your company is classifying workers properly, click here to see our breakdown of the criteria the IRS uses to determine a worker’s classification.

Tags: dol, Form 8952, Fresh Start, independent contractors, information-sharing agreements, IRS, misclassification, tax, VCSP, Voluntary Classification Settlement Program