Thursday, October 20, 2011

Relief From the IRS for Misclassified Workers

In Notice 2011-95 issued on September 21, 2011, the IRS announced a new voluntary compliance program focused on assisting employers in the proper classification of its workers. The new settlement program provides a hugh financial relief for those employers who have improperly classified certain workers as independent contractors that should be classified as employees.

The Issue

It is all too common that employers classify workers as independent contractors that should be treated as employees. There are many reasons this occurs, but some of the most common that I hear include:

  • The employer is just hiring the worker on a trial basis

  • The worker is only going to be working on an infrequent basis

  • The worker is only going to be working on a one time occurence

  • The worker is going to be paid a flat fee

  • The worker wants to be treated as an independent contractor

  • It is too expensive to treat a worker as an employee

Unfortunately none of the above excuses are valid. Relying on such excuses, an employer can end up in the expensive situation of having to pay back payroll taxes when the IRS or a state authority steps into the picture. Even voluntarily correction of a workers classification can be so expensive the an employer prefers to continue on an incorrect path rather than make the necessary corrections.

IRS Provides An Out

The new program announced by the IRS will allow an employer to properly classify a worker as an employee on a prospective basis for a very small payment. Employers are eligible to enter the compliance program if they:

  • Consistently have treated the workers in the past as nonemployees;

  • Have filed all required Forms 1099 for the workers for the previous three years;

  • Are not currently under audit by the IRS; and

  • Are not currenlty under audit by the Department of Labor or a state agency.

An employer can apply for the program by filing Form 8952 at least 60 days before they want to begin treating the workers as employees. For example, if an employer would like to begin treating certain workers as employees as of the beginning of 2012, then it must file the Form 8952 by November 2, 2011.

The form includes a calculation that assesses the amount due on the reclassification. The amount is based on the wages paid during the most recently completed tax year and it is the equivalent of approximately 1.3% of the wages paid. This is a substantial savings over the options that exist outside of this program.

Application of Program for Churches and Other Nonprofit Organizations

One of the greatest liabilities for a church or a nonprofit is errors in the area of payroll. While not all of them center around worker classification, it is one of the most common errors. Churches and nonprofits often make incorrect decisions in this area due to relying on what another church/nonprofit or by relying on what they believe should be the correct classification. The fact is that the definition of an employee is very broad and encompassses most workers in nonprofits other than outside consultants or workers that are clearly operating a business that is available to general public. Some of the most common workers that are misclassified include:

  • Nursery workers

  • Musicians

  • Maintenance workers

  • Other workers that work either part time or on an irregular schedule

Action Required

This program is a definite consideration for all churches/organizations that have a worker classification issue. All organizations should take the time to review the workers currently classified as independent contractors to determine if that classification is correct. It may be necessary to engage a professional to assist with the proper classification of a worker. If this review discloses workers that should be classified as employees, then an organization should consider filing Form 8952 to take advantage of this program. Employers that are accepted into this program will not be audited on payroll taxes related to these workers for prior years. Participating employers will, for the first three years under the program, be subject to a special 6 year statute of limitations, rather than the usual three years than generally applies to payroll taxes.

Monday, October 3, 2011

IRS Offers Relief For Cell Phones

Previously I posted the update regarding the change in cell phone classification in regards to the strict documentation procedures that had been required to justify business use of the cell phone. However, despite the relief given, we were still a little in the dark about the position of the IRS in regards to employer provided cell phones and employer reimbursements for the use of personal cell phones.

The Guidance
Recently the IRS issued Notice 2011-72 granting an early Christmas present to all of us. The notice walks through the same analysis as offered in my previous blog, but it goes one step further. In the notice, the IRS stated that if an employer can determine that it has a bona fide business reason for issuing an employee a cell phone and the cell phone is not considered to be compensation for the employee's services, then it will deem that all the documentation standards of IRC Sec. 132 to qualify the benefit as a "working condition" fringe benefit will have been met and any personal use will be deemed to be a "de minimis" fringe benefit.

While the above notice does not address reimbursements to an employee for the use of their personal cell phone, the IRS issued a memorandum to their field examiners on Septemeber 14, 2011 extending similar logic to reimbursements. The example provided in the guidance allowed the tax free reimbursement of an employee's flat rate plan where the employer deemed that there was a business reason for the employee to have a cell phone.

The Gift
Having documentation "deemed" to be met is the gift from the IRS. Normally, a business would have to maintain documentation to show that the business useage was the predominant use of the phone. With this documentation burden relieved, the employer must only document the business reasons why an employee is required to have the phone. Providing the phone as a part of the employee's compensation package will disqualify this as a tax free benefit. Therefore, I recommend that it not be included in the employee's employment offer as a part of his package.

The Action
Since we are now down to one documentation step, I urge you to not skip this step. When documenting the arrangement with the employee, fully state why it is important that an employee have the cell phone. One word of caution, if the reason is so that the employer can communicate with that employee at any time, you could create a wage and hour issue with nonexempt employees. Remember, if you put them on call, you may have to pay them.