Employees vs. independent contractors – amnesty from the IRS

Misclassification of employees is a widespread issue, especially among small businesses. Studies in the Obama administration estimate that improper classification may occur in as many as 10-30% of all companies.  However, there’s good news from the IRS. A new initiative, the Voluntary Worker Classification Settlement Program, is in place for a limited time to correct classification without interest or penalties. The only fee will be about 1% of wages paid in the past year to cover payroll taxes. Qualifications for companies to participate in the program are:

–         Treating workers as nonemployees

–         Having filed Form 1099 on the workers for the past 3 years

–         Be free of an ongoing audit regarding worker classification

After the current ‘amnesty’ program, the IRS will be more attentive to the issue of misclassification and there will be penalties and interest to pay. To participate, employers must file Form 8652 at least 60 days prior to treating workers as employees. So, check your payroll and make sure that you are compliant. Because the distinction between the categories can be vague, call your tax advisor if there are any questions.