IRS Focuses on Worker Misclassification

The Internal Revenue Service (IRS) is implementing a new program to encourage businesses to properly classify certain “independent contractors” as employees. Under the Voluntary Workers Classification Settlement Program (the “Program”), employers would be permitted to reclassify employees who have been incorrectly classified as contractors. The Program would require employers to pay only 10% of the tax liability that would have been payable in prior years without incurring interest or penalties. Additionaly, participants in the Program will not be audited for worker misclassification for the past 3 years. Employers who fail to participate in the Program and are later found to have incorrect classifications could incur heavy penalties.

The IRS anticipates that most participants in the Program will be small businesses, which could create an additional burden on those companies as they seek to remain competitive with larger entities. When properly classified, independent contractors can often reduce taxes and other costs a small business would incur by having an employee. Moreover, beyond the tax liability incurred upon reclassification, employers could face benefits and wage claims by those employees who were misclassified. Employers who may have misclassified contractors in the past should consult with outside counsel to learn more about the Program.