Employees vs. SubcontractorsMarch 07, 2013
The IRS expands qualification for the Voluntary Classification Settlement Program (VCSP): helps employers reclassify workers as employees for future tax periods.
If there is one topic that is near and dear to the IRS, it is the proper classification of workers. Classifying workers was even the topic of a blog post of mine earlier this year. Unfortunately, this is an unusually appropriate topic for not-for-profit organizations because they frequently retain workers for special projects or programs. All too frequently the not-for-profit organization looks upon these special workers as subcontractors and the IRS believes that in many instances these workers are more properly classified as employees.
There are a number of reasons why an organization hiring a temporary worker would rather classify that worker as a subcontractor. It is easier to add a worker outside of the normal payroll system. The subcontractor knows that their job is temporary. The organization does not have to pay payroll taxes and other employee benefits to the non-employee.
Recently, the IRS has expanded its Voluntary Classification Settlement Program (VCSP in IRS language) and it hopes that more taxpayers will take advantage of this program for “achieving certainty under the law” by reclassifying their workers as employees for future tax periods. It is important to realize that classifying a worker as an employee rather than a subcontractor is, in the IRS’s mind, a way of “achieving certainty under the law.”
I am not sure if the IRS has ever suggested to an employer that an employee would be more properly classified if reported as a subcontractor. If every worker in America were classified as an employee, the government would be happy – that we can be certain of!
While I poke fun at the IRS hinting that you can only be certain of your worker classification if you classify your workers as employees, I can attest to the uncertainty of classifying workers as subcontractors. The IRS publishes a fair amount of guidance on who qualifies for the subcontractor classification. However, having worked with this guidance and been involved in IRS worker classification audits, I know that the guidance and IRS field audit interpretation of the guidance is certainly less than certain.
So what is the expanded VCSP? The IRS has expanded the criteria for qualifying for this program. Now larger organizations may apply including businesses, non-profit organizations and even government entities. Even if you are currently engaged in an IRS audit (as long as it is not an employment tax audit), you may qualify for the program. If you are accepted into the program you will no longer be subject to the special six-year statute of limitations and will only have to deal with the past three years. The expanded program also waives (until 6/30/13) the requirement that you filed Form 1099 for the subcontractors you employed. These and other modifications to the VCSP are described in IRS Announcement 2012-45 and there is a Q&A on this subject posted on the IRS website.
If you are accepted into the VCSP program you will generally pay an amount that is effectively equal to just over 1% of the wages paid to the reclassified workers. The IRS will not assess interest or penalties and these workers will not be part of a payroll tax audit. If you think that the VCSP program can assist you in removing some uncertainty about some of your workers, please contact any member of our Not-for-Profit team for additional assistance.
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