Independent Contractors vs. Employees
Worker classification is a hotly contested audit issue that has caused anxiety for business owners all across the country. Whether a worker is classified as an employee or as an independent contractor can mean a substantial difference in the amount of employment taxes (Social Security, Medicare, and unemployment taxes) and workers’ compensation insurance that the business pays. In addition, the new healthcare reform law imposes healthcare coverage requirements on an employer with more than 50 full-time employees, a fact which may tempt many employers to hire independent contractors instead. It is one thing to legitimately employ an independent contractor, however, an employer who misclassifies his employees either inadvertently or deliberately to minimize its employment tax or healthcare coverage responsibilities may become subject to interest, penalties, and tax liens. Such measures can cripple an otherwise successful business.
A business that is not currently under audit for employment taxes, but wishes to correct its workers’ classification may choose to enter the Voluntary Classification Settlement Program (VCSP). The IRS opened the program in 2011, and it is still in effect. Eligible businesses that enter the program are required to pay only 10% of the employment taxes that would have otherwise been due for the most recent tax year. In addition, there would be no interest or penalties, and the IRS would not conduct an employment tax audit of the business. For details on VCSP go to http://www.irs.gov and search for VCSP.
In light of the IRS’ predominantly pro-taxpayer initiatives, you may want to re-examine your worker classifications at this time. Even when potential employment tax liabilities are not overwhelming, it’s important to remember that misclassification can also cause pension plan difficulties.
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