IRS Fresh Start for Employers

The IRS announced an opportunity for a fresh start for employers on the much debated classification of contract laborers as employees. Procedures outlined in IRS Announcement 2011-64 offer business owners a window of opportunity to voluntarily reclassify contract laborers as employees within certain guidelines. This voluntary reclassification, called the Voluntary Classification Settlement Program (VCSP), allows eligible employers to reclassify contract laborers as employees on a forward looking basis with only minimal federal, social security, and Medicare tax exposure for past liability periods (note, however, that state withholding and workman’s compensation authorities are not bound to this program). The IRS, in previous publications, has announced an expected increase in the number of audits in this area due to non-compliance and wants to give employers a chance to change any misclassifications they may be aware of. To be eligible, the employer must have treated the workers or group of workers consistently as independent contractors and issued 1099-Misc forms for services performed during the last three years. An employer under IRS or DOL audit is not eligible even if it otherwise would have met the conditions set forth. If an employer has been previously audited and has continued to comply with the conditions of that audit, the employer will be eligible for the program. The application is made on form 8952. On this form, the federal tax and social security withholdings are calculated by taking the 1099-MISC income for the entire group of laborers who are being reclassified as employees, multiplying that number by a pre-determined factor (10.68% for 2010 and 10.28% for 2011 for laborers under the social security wage base threshold amount), the product of which is multiplied by 10%. There are no penalties or interest assessed on the result of this calculation, but the employer agrees to treat the workers as employees on a prospective basis and a six year statute of limitations instead of three. Please contact Kelly Phillips or Nell Sterling at (501) 753-9700 if you have questions regarding the calculation and how it may benefit you. Bell & Company can help you apply for the program through the IRS. WARNING: Carefully think through the reclassification process for 2011 and into the future. For instance, consider the impact upon the 50 person employee rule (base measurement used by the health care reform to be effective in 2014), matching payroll taxes, etc. Also, be aware - this fresh start opportunity has not been adopted by the State of Arkansas for unemployment and state withholding purposes. One should carefully consider the implication of these additional taxes when evaluating the reclassification process.