By David M. Kendrick, CPA, MST

Based on the recent success of the voluntary compliance program for foreign account reporting, the IRS announced a new program that allows employers to voluntarily reclassify their workers from “independent contractor” to “employee”. The Treasury believes a substantial amount of payroll taxes remains uncollected due to improper classification of workers.  Generally, if an employer has the right to direct and control how a worker performs services for the employer, that worker is considered an employee and the employer must withhold federal income and payroll taxes from compensation.  
This program is designed to be a revenue raiser by encouraging employers to take a hard look at how they currently treat contractors and voluntarily reclassify them as employees. In exchange, the IRS program gives employers a break regarding penalties and interest on these misclassified employees.  The IRS also states that employers will not be audited regarding the payroll taxes related to these workers for prior years. 
However, this new program also comes at a cost.  Eligible employers will pay an amount effectively equaling a little over one percent of the wages paid to the reclassified workers for the past year. Also, going forward over the next three years,  participating employers will be subject to a special six-year statute of limitations as opposed to the standard three years that generally applies to payroll taxes.
Per the IRS announcement, to be eligible an applicant must:
• Consistently have treated the workers in the past as independent contractors,
• Have filed all required Forms 1099 for the workers for the previous three years
• Not currently be under audit by the IRS
• Not currently be under audit by the Department of Labor or a state agency concerning the classification of these workers
As will all IRS matters, this program has raised some questions regarding its effectiveness to reach its objectives.  For one, the classification of workers is subjective and other factors must be weighed when making this business decision.  Also, most employers likely take the position that they have properly classified their workers in the first place and others may be leery to go on record regarding past errors. This program is unlikely to achieve the success of the foreign account reporting program; identifying a foreign account is a black and white affair while identifying an improperly classified worker is about as clear as the November skies in Seattle!  Reclassifying workers may also unearth other issues and costs such as minimum wage, overtime, worker’s compensation and employee benefits.  The IRS has taken a more intense interest on how employers classify workers.  We can assist you with this decision-making process and invite you to contact us if you have any questions regarding this issue.