employee classification

Settle Your Worker Classification Problems with No Penalties

Barbara Weltman — Fri, 07 Oct 2011 18:11:29 +0000

Link:

http://www.openforum.com/articles/settle-your-worker-classification-problems-wit...

One of the thorniest issues in taxes is determining whether a worker is an employee or independent contractor. The stakes are high for getting the answer right. If you mistakenly call a worker an independent contractor but the IRS or your state labor department later reclassifies the worker as an employee, you can owe back payroll taxes, plus interest and penalties. You can also owe back unemployment insurance and workers’ compensation, as well as any fringe benefits you normally give to employees, such as health care and retirement plan contributions for the reclassified workers.

Now the IRS has made it simple for employees on the fence about their worker classification to make things right…easily and with no penalties. Here is how the new worker classification program works and some pointers to help you decide whether this option is right for you.

About the Program

The new program is called the Voluntary Classification Settlement Program (VCSP). As the name implies, participation is voluntary. You can choose to participate if:

You consistently have treated the workers in the past as independent contractors;
You have filed all Forms 1099-MISC for these workers for the previous three years; and
You are not currently under audit by the IRS, the Department of Labor, or any other state agency concerning the classification of these workers.

The cost to you for participating in the program is only 10 percent of the employment taxes due on wages paid to the reclassified workers for the past year. There is no interest and no penalties. You will not be audited on payroll taxes related to these workers for prior years. And you will not have any legal and accounting fees that would occur if you have to fight a challenge to your worker classification at the federal or state level.

However, if you participate, you will be subject to a special six-year statute of limitations for the first three years of the program, rather than the usual three years that usually applies to payroll taxes. This will allow the IRS to keep a close watch to make sure that you continue to treat reclassified workers as employees.

How to Participate

If you decide that you want to participate, you must apply by filing IRS Form 8952, Application for Voluntary Classification Settlement Program, with the IRS at least 60 days before you begin treating the workers as employees.

No payment is made with this application. Payment will be made when you are accepted into the program and sign a VCSP closing agreement.

The IRS will notify you that you have or have not been accepted into the program. If you are rejected, you can reapply at a later time.

Should You Participate?

Since the program is voluntary, it is up to you to decide whether it makes sense for your company. Here are some factors to consider:

Selective reclassification. You can decide which workers to reclassify and which to leave as independent contractors. However, if you reclassify a worker in a particular class (i.e., doing a certain type of work), then you must reclassify all workers within that class. The IRS gives this example: A construction company works with drywall installers, electricians, and plumbers. It wants to reclassify drywall installers as employees. It must reclassify all such workers; this does not include electricians and plumbers.
Previous audit. If you have already had an audit from the IRS or Department of Labor concerning classification, you are not barred from this program. However, if your classification of workers as independent contractors has survived an audit, you may not want to participate.
Extent of reclassification. Once you agree to reclassify a worker as an employee, this reclassification applies not only for federal employment taxes going forward, but also for other federal and state employment laws, including federal and state wage and hour laws, unemployment compensation laws, anti-discrimination laws, and other laws and regulations applicable to employees.

Final Word

It is highly advisable to discuss your situation with your tax advisor to make the best decision for your company. You may also want to review questions and answers about the program provided by the IRS.

This article is from Barbara Weltman of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

4 Thorny Payroll Tax Issues and How to Handle Them

Barbara Weltman — Sun, 27 Feb 2011 00:07:29 +0000

Link:

http://www.openforum.com/idea-hub/topics/money/article/4-thorny-payroll-tax-issu...

Small businesses historically have created 70% of all jobs in the United States. With such a high percentage of the workforce, employee-related tax challenges for small business owners are probably inevitable. Here are four common tax pitfalls and what you can do about them.

Personal Use of Company Cars

Many small business owners and some employees drive cars or trucks that are owned or leased by their companies. This arrangement lets the company deduct the costs of the vehicle. However, employees (including owners) are viewed by the IRS as gaining a taxable benefit for their personal driving. How is this valued?

The tax law gives companies several options about how to value the personal use, including:

* Report all of the value of vehicle usage and let the employee deduct his or her business use. While the easiest option for the company, it isn’t helpful for employees.

* Report the fair market value of the personal usage (what the employee would have to pay a third party for the same benefit).

* Figure the value of personal usage based on something called an annual lease value (ALV).

Discussion of each of these methods for valuing personal usage can be found in IRS Publication 15-B.

Worker Classification

When you need additional help, should you hire an employee or engage an independent contractor? There are both tax and practical considerations to this decision. Taxwise, it’s considerably less costly to use an independent contractor. With this in mind, the question of worker classification—as an employee or independent contractor—is high on the IRS’s audit list. And states also look closely at worker classification when workers seek unemployment benefits or workers’ compensation.

The problem is that you can’t simply attach a label to a worker and automatically make it stick. From the government’s perspective, if you have sufficient control over the worker—you have the right to say when, where, and how the work gets done—then the worker is an employee, regardless of any label. According to the IRS rules for worker classification, a determination depends on behavior and financial issues as well as the relationship of the parties.

What to do:

Look at how other companies within your industry classify their workers. If there is a long-standing industry practice of treating certain workers as independent contractors, this can be helpful.
Have independent contractors sign agreements acknowledging that they are responsible for their own taxes. These agreements won’t bind the IRS, but they are helpful to show that both you and your contractors view the arrangement as other than employer-employee.
Be consistent. Treat all workers doing the same type of work in the same manner.
Issue Form 1099-MISC to workers you are treating as independent contractors.

Recent Court Decisions Increase Uncertainty

The U.S. Tax Court and federal courts are continually deciding thorny tax questions. Do these decisions affect you? It depends.

One key issue that’s moving through the courts at the moment concerns the constitutionality of the Patient Protection and Affordable Care Act (“Obamacare”). One U.S. district court has said that the federal government has no constitutional basis to mandate that each person buy health coverage and has concluded that the entire act, including various tax provisions (such as the small employer health care credit), is unconstitutional. No one is quite sure at this time what this means for the tax provisions within the Act.

Another case (Quality Stores, Inc.) decided last year said that severance benefits were not wages for purposes of payroll taxes. The IRS, as well as some courts, continue to disagree. Some practitioners have been advising companies with laid off workers that paid FICA and other payroll taxes on severance benefits to file refund claims even though the issue isn't settled. Why? Because generally refund claims must be filed within three years of the original return filing date. The IRS has indicated it will not give refunds at this time. Companies that paid severance benefits in the past several years should discuss this issue with their CPAs or other tax advisors.

Cash Flow Problems

Small businesses, from time to time, may experience cash flow problems. Not having sufficient cash means deciding which creditors to pay first.

It’s vital for small business owners to pay the government first when it comes to certain payroll taxes and excise taxes. The income taxes and employees’ share of FICA that you withhold from their pay is considered “trust fund” money. Excise taxes you collect in the course of your business, such as a gas station’s collection of excise taxes on gasoline sales, are also trust fund money.

You have collected the money in trust and, as a responsible person, must pay it to the government. If you fail to do so, you can be held 100% personally liable for the unpaid amount, plus penalties and interest. This is true even if your business is incorporated or is a limited liability company; your entity does not protect you from this tax obligation.

The IRS has helpful information about the trust fund recovery penalty. If you are facing a cash crunch with unpaid trust fund taxes, meet with your financial advisor to figure out the best way to handle the situation.

This article is from Barbara Weltman of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: