Have you heard horror stories about how the IRS audits business owners, deems their 1099 independent contractors W-2 employees, and then assesses tens (or hundreds) of thousands of dollars in back payroll taxes, interest, and penalties?
QUESTION: Are you one of those horror stories?
Let’s say you are one of them. You are an IRS target because you have employees who should be employees but treat them as independent contractors. And you are afraid that if you change now, the IRS will see that change, audit your prior years, and charge BIG bucks for your mistake.
Question: What should you do?
- Amend your past returns to show the misclassified workers as employees?
- Or keep the workers as independent contractors and hope the IRS doesn’t catch on?
Amending the tax code could be expensive, depending on how many workers are misclassified.
The Pennies-on-the-Dollar Come-Clean Program
The come-clean program is an IRS Voluntary Classification Settlement Program for business owners who want to change their worker classification.
To be eligible for the VCSP, you must meet the following requirements:
- Reporting consistency: To treat workers as independent contractors, you must have timely filed their federal tax returns for the past three years.
- Not currently under audit: You cannot currently be under employment tax audit by any government agency.
Benefits of the VCSP Settlement Agreement
If you agree to treat workers covered by a VCSP as employees for future tax periods, you will receive certain benefits:
- Reduced employment tax liability. For the most recent tax year, you pay 10% of the employment tax liability that would have been due on compensation paid to workers. (About 3.3% of what that likely would have been for the past three years.)
- No interest or penalties. You will not be liable for any interest and penalties. (Knock that 3.3% down to 0.93%.)
- Audit protection for misclassifications in prior years. You will not be subject to an employment tax audit for prior years concerning the workers covered by the VCSP. (Priceless.)
There is a minimal downside to participating in the VCSP; If you have misclassified workers. You will have to treat the workers covered by the VCSP agreement as employees on a going-forward basis.