Tuesday, March 5, 2013

IRS Expands Worker Reclassification Program

As if the IRS hasn't already given a huge gift to employers with the creation of the worker reclassification program in 2011, it has now topped off that gift with a big red bow. 

In 2011, the IRS provided a means to allow employers to reclassify workers from independent contractors to employees in a fairly simple process with a very low cost.  The effective cost was approximately 1% of the worker's compensation in the year previous to the reclassification.  Compared to the fact that the traditional cost of reclassifying a worker was 10 to 15% of compensation for three years, the new program provided an easy and cost saving mechanism for solving worker classification issues.  (See my post in October of 2011 for the original details of the program.)  In December of 2012, the IRS expanded the program through Announcement 2012-45 and 2012-46. 

Announcement 2012-45 expands the program in the following manner:

Originally the program stated that if the employer was undergoing an IRS exam, it was not eligible for the program.  Now the employer will be eligible to participate in the program as long as the exam is not classified as an employment tax exam.  It also clarifies that an employer that is a part of a controlled group must look to the entire group of employers when determining this criteria.  Employers that are contesting a reclassification issue in court do not qualify for to participate in the program.  Also, an employer is still ineligible if it is going through a DOL exam or a state employment exam. 

Additionally, participation in the program no longer extends the statute of limitations on the Forms 941 that include the reclassification.  All employment returns will maintain their natural statute of limitations.

Announcement 2012-46 went on to temporarily expand the program in an even greater manner:

Under the original program, the employer has to have properly filed all Forms 1099-Misc for any workers that it desires to reclassify as employees.  If the employer failed to file the required forms in the previous 3 years, it is not eligible for the reclassification program.  The IRS has alleviated this requirement for persons who apply to the program through June 30, 2013.  This means that even if an employer did follow the law in reporting a worker as an independent contractor, it may still participate in the program through June 30, 2013.  The amount assessed in this settlement program is higher than the regular settlement program as it assesses an amount equal to approximately 3.2% of the compensation paid in the previous year.   There is a graduated penalty assessed for the nonfiling of the required Forms 1099-Misc.  In addition, the employer must file all outstanding Forms 1099-Misc for the past three years. 

This program is truly a gift to those employers who have misclassified workers.  It provides a clean slate going forward as opposed to a potentially large tax assessment for each of the past three years.  The IRS reports that nearly 1,000 employers have participated in the program to date.  However, from experience, I know there are many more employers that need to participate in this program.  If a church or nonprofit has fallen prey to bad employment classification habits, now is the time to break them and move forward into a new arena of better compliance as well as less monetary risk to the organization.

5 comments:

  1. Hi there! great stuff here, I'm glad that I drop by your page and found this very interesting. Thanks for posting. Hoping to read something like this in the future! Keep it up!

    Do you have problem with irs payroll tax? The IRS continues to use Enforced Collection when it comes to unpaid payroll taxes and payroll returns that haven’t been filed. Enforced Collection can include a levy on the assets of the business, including the accounts receivable, equipment, automobiles and bank accounts.

    The IRS can also close a business for non-payment of payroll taxes. If the business is closed or files for bankruptcy protection, the IRS will look to the owner of the business for collection of the penalties, interest, taxes and trust funds. In the case of a corporation or a partnership, the IRS will look to the person responsible for paying the payroll taxes to collect the trust funds. This is known as the Trust Fund Recovery Penalty.

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  2. Kaieza, I am glad you found the blog. Honestly, I don't have problem with the payroll tax and the enforcement in this area. While I know it is harsh at time, the fact is that when payroll taxes are not paid, the business has misappropriated the funds that it withheld from its employees. The trust fund recovery penalty is really a way for the IRS to recoup funds that the business originally withheld from employees and it does not extend to the business' portion of the taxes. This is why it is critical to remember that as employers, we are stewards of money belonging to others and extra caution should be taken to make sure it is properly remitted to the IRS in a timely fashion.

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  3. Thanks for mentioning this valuable info! I am now in my second year with my nonprofit which is very exciting. I'm doing all I can to make it even more successful than last year. I can definitely use these irs tax help for more assistance.

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  5. What if partner was treated as employee on payroll. Went back and corrected and now filing amended returns. Is this proper procedure?

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