Benefits of Converting Contractors to Employees

Independent contractors are a vital part of the American workforce. They work for themselves, usually providing services to other businesses. While this setup offers many advantages to both the contractor and the hiring business, it can also create tax problems.  

You may have read about horror stories of the IRS auditing businesses and deems their 1099 independent contractors W-2 employees and assessing several thousands of dollars in payroll taxes, interest, and penalties.

Are you one of these businesses? 

 Therefore, let’s assume that you are one of them. You have workers who really should be employees, but you pay them on a 1099 and treat them as independent contractors. And you are afraid that changing now could cause the IRS to investigate your prior years, resulting in hefty fines for your error. 

If the Internal Revenue Service (IRS) discovers that you incorrectly considered your workers as independent contractors, you might encounter many problems. Amending your past tax returns could be costly based on the number of workers you misclassified and the number of years. 

 But you have come to the right place. This article will show you how the IRS is offering a way for you to come clean and reclassify those workers as employees and get away with only paying pennies on the dollar for these past mistakes.

The program is called Pennies-on-the Dollar  

 The IRS released a new Voluntary Classification Settlement Program (VCSP) program in September 2011. The VCSP is an agreement between the IRS and a company to reclassify its workers as employees for federal employment tax purposes. This settlement program offers several benefits to participating companies, including partial relief from federal employment taxes, no penalties, and limited auditing. The IRS Voluntary Classification Settlement Program (VCSP), also known as the come-clean program, offers business owners to pay pennies on the dollar to change their workers classification on a going-forward basis. 

 Not everyone qualifies for the program. To be eligible to participate in the VCSP, you must fulfill the following requirements. 

1.Consistency in reporting: You must have filed your last three years’ federal tax returns for your workers (1099s) consistent with your classification of the workers as independent contractors. 

2.Must not be under audit: You are not currently under audit by the IRS, nor any government agency, under worker classification.  

Benefits that may be gained from VCSP’s Settlement Agreement   

If you decide to take part in the VSCPA, you must adhere to the agreement and agree to treat the class or classes of employees covered by the agreement as employees for tax periods hereafter. In return, you’ll receive the following most favorable benefits: 

∙Reduction in tax liabilities: You only pay 10 percent of the tax that would have been due on 

the value of compensation paid to the worker in the last year. (Pennies on the dollar for one year, approximately 3.3 percent of what that most likely was for the past three tax years.) 

∙No interest or penalties: You will not have to pay interest and penalties. (Knock it that 3.3 percent down to something like 0.93 percent.)  

∙Protection from Audit: The employees covered by the VCSP will not be subject to an employment tax audit for any prior years. 

 So, as you can see there is very little downside to participating in the VCSP except of course that you will have to treat your workers under the VCSP as employees on an ongoing basis.

Procedure to apply in VCSP  

 Applicants who seek to participate in the VCSP must apply by using the Internal Revenue Service (IRS) Form 8952, Application for Voluntary Classification Settlement Program. You can fill out and apply no less than 60 days prior to the date you would like to begin treating your workers as employees. The IRS will make every effort to process your application on time to allow you to change the status on the requested date. 

 If the IRS accepts your application for the VCSP, you sign a contract to settle the terms of your VCSP and pay your outstanding debt in full.

Important points to note  

 This article summarizes a couple of vital takeaways. The IRS VCSP offers business owners who previously misclassified their workers as independent contractors to pay pennies-on-the-dollar to change this misclassification on a going-forward basis. To be eligible businesses must: 

∙Not be under employment tax audit by any State or Government agency. 

∙You must have filed 1099s for your independent contractors for the most recent three years. 

∙The VSCP agreement results in a minimal employment tax liability, and no penalties or interest. 

∙VCSP agreement is a contract and is binding for future tax periods. 

If you have more questions about how best to classify your workforce, either W2 or 1099, give us a call at 281-440-6279 today!