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.


  1. Hiring someone for a trial basis is not that far from being a trainee for a couple of months and needing to prove yourself to become a regular employee. If this is the case, there's usually no tax deductions yet because you'll only be receiving allowances.

    Sunday  Hindman

  2. Simply put, if the employer has control over what -- and how -- a worker does their work, then they are classified as an employee. If not, then they are an independent contractor. Hence, the tax treatment will be different for each as workers have different tax rules that apply to them.

    Wystan Dale

  3. According to IRS Commissioner Doug Shulman, the settlement program provides certainty and relief to employers in an important area as part of a wider effort to help taxpayers and businesses gain a fresh start with their tax obligations. A worker, regardless of whether or not he/she is an independent contractor, still works for a superior, making them their employee. Classifying them as anything else other than an employee is already ripping them off.

    Harley Mcgowan

  4. Thanks for sharing useful information. Indeed IRS Settlement was a big pain and it almost screwed my future, poor credit score and all worse that can happen. Still i was lucky to find few experts that helped in my irs debt settlement, were experts and help me in IRS settlement quickly. I was helped, hope you will too.