Many employers worry about how they classify workers. While it seems less costly to classify many workers as "independent contractors" rather than "employees," the IRS can generally make a wrong decision in this area very costly to the employer. This all stems from the collection of taxes associated with payments to such workers.
If a worker is classified as an employee, the employer does all the withholding, matching, and payment of all payroll taxes, including federal and state withholding, medicare and social security, and federal and state unemployment. If a worker is an independent contractor, the worker is responsible to report the income earned on an appropriate tax form, may claim business expenses against such income, and then must pay in appropriate estimates to cover federal and state income taxes and both halves of medicare and social security taxes. Unemployment taxes most likely will not be due. Consequently, employers would probably go the route of classifying all workers as independent contractors, if they could.
IRS is not happy with this situation, and congress has passes laws to stop abuses. When someone is "caught" misclassifying an employee as an independent contractor, the results can be disastrous. First, by the time an employer is audited for the payment of such taxes, several years may have passed, and the IRS may go after all the past due taxes. Second, there is usually a significant penalty associated with such unpaid tax. Finally, there is interest due on the late payments. This can often add up to three or four times the amount originally due.
Even with such laws, there are not enough agents to adequately police the situation. In comes project "Fresh Start." Under this IRS program, qualifying businesses may avoid most of the taxes, penalties and interest associated with such situations by filing form 8952, Application for Voluntary Classification Settlement Program, at least 60 days prior to the start of treating such workers as employees. In addition, qualified applicants must:
- have treated such workers as nonemployees on a consistent bases
- have filed 1099’s for all such workers for the three most recent years
- not be under audit by the IRS
- not be under audit by the Department of Labor or the Wisconsin Department of Workforce Development concerning how to classify such workers
If you have this problem and can get accepted into this program, all you have to pay is about 1 percent of the workers’ wages for the prior year. You avoid all further costs and expenses. For more details, you can view this IRS site.