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Morris Manning & Martin, LLP

IRS "Crackdown" on Classification of Independent Contractors

05.06.2013

A recent article in The Wall Street Journal discussed the many pitfalls facing employers due to the Internal Revenue Service’s “crackdown on employers who misclassify workers as independent contractors to avoid paying payroll taxes, and other employment-related expenses.”  Employers are required to withhold and pay income taxes, Social Security, Medicare, and unemployment taxes for employees, but not for independent contractors.  According to a Treasury Department estimate, the IRS could generate an additional $8.71 billion in added tax revenue over the next decade by forcing employers to properly classify workers as employees.

Meanwhile, the incentives for employers to classify workers as independent contractors continue to increase, particularly as certain provisions of the Patient Protection and Affordable Care Act come into effect, which will require employers to provide for employee health insurance or pay a penalty. 

The Employment and Tax Practices at Morris, Manning & Martin, LLP can assist employers in properly classifying workers and mitigating the repercussions of past misclassification.

Among the services offered by MMM are the following:

  1. Worker Classification Review – Review current classifications of employees and independent contractors, identify and resolve concerns, and develop strategy for avoiding misclassification.
  2. Advice Regarding the Voluntary Classification Settlement Program (VCSP) – In December 2012, the IRS announced an indefinite extension to the VCSP, which allows employers to voluntarily reclassify independent contractors as employees.  Under the VCSP, employers agree to treat the workers as employees prospectively and pay 10 percent of the employment tax liability that may have been due on compensation for the most recent tax year.  In exchange, the IRS will waive any interest and penalties on the tax liability and the employer will not be subject to an employment tax audit with respect to the classification of workers for prior years.  However, employment tax is only one component of the liability associated with misclassification, and even those employers who participate in the VCSP face additional risks and liability.  MMM can review these issues with employers, as well as the advantages and disadvantages of participating in the VCSP.
  3. Audit Response – MMM’s Tax Controversy & Litigation attorneys have extensive experience representing clients in employment tax examinations conducted by the IRS.