The advantages of classifying workers as contractors (1099) and not employees (W-2) are numerous. The two main reasons is that it is cheaper (no liabilities for payroll taxes nor any unemployment taxes) and flexibility (it is real easy to fire a contractor, no need to comply with"ObamaCare").
So the temptation for employers to treat their employees as contractors has never been greater. The IRS has been warning for some time that they would be cracking down hard. The cost for misclassifying worker can be huge. Not just because of crippling penalties, but because the IRS is going to be looking at at least three years of payroll taxes (employers portion of social security and medicare about 8%). And then the IRS will certainly "share" this information with state employment agencies.
But instead of waiting and hoping not to get caught, employees now have a chance to "come clean":
IRS Announces New Voluntary Worker Classification Settlement Program; Past Payroll Tax Relief Provided to Employers Who Reclassify Their Workers
WASHINGTON – The Internal Revenue Service today launched a new program that will enable many employers to resolve past worker classification issues and achieve certainty under the tax law at a low cost by voluntarily reclassifying their workers.
This new program will allow employers the opportunity to get into compliance by making a minimal payment covering past payroll tax obligations rather than waiting for an IRS audit.
This is part of a larger “Fresh Start” initiative at the IRS to help taxpayers and businesses address their tax responsibilities….
To be eligible, an applicant must:
- Consistently have treated the workers in the past as nonemployees,
- Have filed all required Forms 1099 for the workers for the previous three years
- Not currently be under audit by the IRS
- Not currently be under audit by the Department of Labor or a state agency concerning the classification of these workers
Now, why would someone want to come clean? Let's take a look at that 8% of payroll for the past three years mentioned above. Add in additional penalties. Someone with a yearly subcontractors of $100,000.00 could be looking at a bill, with penalties and interest close to $100,000.00!
So what is this deal that the IRS is offering?
Employers accepted into the program will pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers for the past year. No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years. Participating employers will, for the first three years under the program, be subject to a special six-year statute of limitations, rather than the usual three years that generally applies to payroll taxes.
One percent for one year? That is not too bad a deal.
If you have any payroll tax issues, contact us for assistance. We can help. Call us at 888-727-8796 or email info@irsmedic.com.
