So you've made all your workers independent contractors instead of employees to save payroll taxes you've been paying. It sounded like a great idea.
- You saved thousands of dollars on employment taxes
- You didn't have to worry about filing payroll (941) tax returns
- You saved the quarterly payroll processing charges you've been paying
- Maybe even your accountant suggested it to you
Well, its a bad idea … and now you know it.
- You're worried sick that you're going to get caught
- You've read that the IRS launched a pilot program specifically targeting this issue that's about to go into full force in the next few months
- You realized that having your workers sign an agreement isn't worth the paper its written on
- And you're months (if not years) out of compliance
What are you going to do?
Your probably asking yourself
- If you start paying payroll taxes now, aren't you going to raise red flags?
- What about the back taxes? How are you going to pay these?
- What if you just start a new Company? Will that work?
- What about the workers? Are you going to have to pay them more now that you're withholding payroll taxes?
- What about the 1099 forms you never gave them?
Great questions, but you need to know more.
The New Voluntary Classification Settlement Program In late September 2011, the Internal Revenue Service (IRS) launched a new tax relief program that may help you resolve your past worker classification issues and come clean at a relatively low cost to you [Announcement 2011-64] . This is part of a larger "Fresh Start" initiative to help business taxpayers clear up their tax debts from the misclassification of workers known as the new Voluntary Classification Settlement Program (VCSP). Under the program, eligible employers can obtain relief from past federal payroll taxes if they treat workers as employees going forward.
Who is eligible? To be eligible, you must:
- Consistently have treated workers in the past as non-employees
- Filed all required Forms 1099 for the workers for the past 3 years
- Not currently be under IRS audit
- Not currently be under audit by the Department of Labor or state agency regarding the classification of workers
What will the tax relief program cost you?
Employers accepted into the New Voluntary Classification Settlement Program program will pay roughly one percent of the wages paid to the reclassified workers for the past year.
What are the benefits of the tax relief program? The benefits are huge. You'll pay no interest or tax penalties. And you will not be audited on payroll taxes related to these workers for prior years. Payroll tax penalties are huge and can save you thousands.
What else will the tax relief program cost you? For the first 4 years under the program, you will be subject to a special 6 year statute of limitations, rather than the usual 3 years that applies to payroll taxes.
How to get started To get started, contact your taxpayer resolution advisor or CPA. This is not the kind of do-it-yourself program when the risks can be great. If you contact your CPA, make sure they know how to do this, or at the very least have heard about the program and can help you. Otherwise, call us!
You will need to complete Form 8952, Application for Voluntary Classification Settlement Program at least 60 days before you want to begin treating your workers as employees.
As this is a voluntary compliance program, your taxpayer rights will be protected once you qualify. Paying a 1% charge is nothing compared to the penalties you can be charged.