I’ve often discussed the need behind properly classifying workers as independent contractors or employees. The risk in paying workers as independent contractors is that you, as the employer, may be penalized, fined and required to pay back employment taxes if the workers are paid incorrectly. This includes state and federal taxes, and there’s even a chance that those workers could bring an action to recover the share of taxes they paid.
If you need to reclassify workers, you should think before doing it right away, since that will raise a flag with the IRS. Fortunately, the IRS offers a type of amnesty program that may allow you avoid some liability.
The IRS offers the Voluntary Classification Settlement Program, which is a step-by-step process for reclassifying independent contractors as employees. The application for the program must be done 60 days prior to the scheduled change. Under this program, your business will:
- Pay 10 percent of the employment tax liability that would have been due on compensation paid to the workers for the most recent tax year.
- Avoid any interest and penalties on that amount; and
- Avoid an employment tax audit for prior years.
If you’re going to reclassify your workers, I highly recommend looking at this process and discussing it with your advisors prior to making the change.