IRS Guidance Favorably Modifies Voluntary Worker Classification Settlement Program Article By: David Diaz Diane M. Morgenthaler Ruth Wimer, Esq., CPA McDermott Will & Emery posted on: Tuesday, January 8, 2013 (Employee or Independent Contractor for tax purposes--for deciding how sales reps should be treated)

One year ago the Internal Revenue Service (IRS) published Announcement 2011-64, which provided a Voluntary Classification Settlement Program (VCSP) for employers to treat their workers as common law employees rather than independent contractors only on a prospective basis.  Now the IRS has issued two new announcements that favorably modify and expand the VCSP.  Because certain favorable tax relief is available only for applications filed before June 30, 2013, employers should review quickly their worker classification issues in light of this new guidance.

On December 17, 2012, the Internal Revenue Service (IRS) issued Announcements 2012-45 and 2012-46 to revise the tax relief for employers that utilize the Voluntary Classification Settlement Program (VCSP).  Originally established in December 2011, the VCSP permits eligible taxpayers to voluntarily reclassify their workers for federal employment tax purposes and obtain limited tax relief for previous nonemployee treatment. 

Background

The IRS overwhelmingly favors classification of workers as employees rather than independent contractors in part  because withholding of employment taxes is required for the former and not the latter.  Whether a worker is performing services as an employee or as an independent contractor depends upon numerous facts and circumstances, but the most important factor is whether the worker is subject to the employer’s right to direct and control the worker as to what and how services are performed.  The determination of a worker as an employee is often not self-evident.  For employers under IRS examination, the Classification Settlement Program (CSP) is available to resolve federal employment tax issues related to worker misclassification if certain requirements are met.  The CSP allows the prospective reclassification of workers as employees with reduced federal employment tax liabilities for past nonemployee treatment.  The IRS determined it also would be beneficial to offer employers a program that allows voluntary reclassification of workers as employees without paying all past employment tax liabilities and without correcting past employer quarterly federal tax returns (Form 941).  Accordingly, the IRS issued Announcement 2011-64 last year.  The tax relief available under the VCSP—only 10 percent of the employment tax liability for one year—is similar to that available under the CSP, and the VCSP has become very popular. 

Continue reading here