On Wednesday the IRS announced a new program for small businesses to voluntarily reclassify workers to comply with Federal law regarding the classification of workers as employees or independent contractors. This program is based off the IRS’s Classification Settlement Program for businesses already under audit. You can read the IRS announcement here.
The program is designed to increase payroll tax compliance by offering businesses the opportunity to reclassify their workers before any audit occurs. In exchange, any business voluntarily reclassifying workers will receive substantial relief from payment of past payroll taxes and penalties.
To be eligible for the program, the business must have:
- Consistently treated workers in the past as nonemployees;
- Have filed all required 1099s for those workers for the previous 3 year period; and
- Not currently be under audit by the IRS, Department of Labor; or a state agency regarding the classification of those workers.
It is important to note that while the disclosure is voluntary, the relief under the Voluntary Worker Classification Settlement Program is not automatic. Interested employers must file an application for the program at which time the IRS will determine whether or not the business qualifies. If the IRS accepts the application then the employer is required to enter into a closing agreement with the IRS and agree to an extended statute of limitations for any violations that occur during the next three years.
The reduced payment required under the program is equal to ten percent of the payroll taxes due for the prior year. There are no penalties or interest assessed and the business is not required to pay taxes from two and three years prior.
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