Employee or Independent Contractor? IRS Offers Amnesty

Partner John Mathias

One of the more difficult questions facing a business is whether a service provider is an employee or an independent contractor. Answering this question requires an interpretation of both individual facts and circumstances and common law. If the business decides that the service provider is an independent contractor, the obligation to remit income taxes and pay employment taxes falls squarely on the independent contractor. If the business, however, considers the service provider an employee, the business assumes all obligations to remit income, social security and Medicare taxes as well as the liability for matching payroll taxes.

Businesses that have been liberal in construing service providers as independent contractors could face large employment tax liabilities for past non employee treatment. Those businesses currently treating some of their service providers as independent contractors now have the opportunity under the Voluntary Classification Settlement Program (VCSP) to voluntarily treat these workers prospectively as employees. In exchange for this “amnesty” the business will pay ten percent of the employment tax liability that may have been due on the compensation paid to these workers. The employment tax liability will be calculated under the reduced rates of section 3509 of the Internal Revenue Code. In addition, the taxpayer will neither be liable for any interest and penalties on the liability nor subject to an employment tax audit with respect to the classification of workers for prior years. Any taxpayer participating in the VCSP must agree to the extension of the period of limitations on the assessment of employment taxes.

To be eligible for the VCSP, a taxpayer must have consistently treated the workers as nonemployees, filed all required Forms 1099 and not be under audit by the IRS, Department of Labor or any state government agency. Eligible taxpayers who wish to participate in the VCSP must submit an application for participation in the program. Information about the VCSP and the application is available on www.irs.gov.