IRS Relief Program For Employee ‘Contractor’ Misclassification

HARTFORD — According to the Connecticut Business and Industry Association (CBIA), the Internal Revenue Service recently launched a voluntary compliance program with tax relief for qualifying employers who have mistakenly classified workers as independent contractors.

The IRS’s Voluntary Classification Settlement Program allows participating business owners, tax-exempt organizations, and government entities to reclassify contractors as employees and make only a small payment to cover past payroll taxes.

The IRS will not hit participating employers with interest or additional penalties (such as the 20 percent accuracy penalty), and the agency will agree not to audit prior years’ employment tax returns with respect to the reclassified workers.

Hiring independent contractors is common across many industries, especially in this difficult economy.

But some employers will label their employees as “independent contractors” on government agency filings in order to avoid paying workers’ compensation, wage withholding, and unemployment taxes.

Misclassifying someone as a contractor when he or she clearly is an employee costs millions in lost tax revenue each year. It also harms the state’s business community by giving an unfair advantage to dishonest employers who do not pay their fair share of tax and insurance obligations.

Connecticut and 11 other states have also entered into an agreement to coordinate efforts to fight employee misclassification. Under the agreement, the US Department of Labor (DOL) will share information and coordinate law enforcement with the IRS and participating states.

Business models that attempt to change, obscure, or eliminate the employment relationship are not inherently illegal, says DOL, unless they are used to evade compliance with labor laws — for example, if an employee is misclassified as an independent contractor and subsequently denied rights and benefits to which he or she is entitled under the law.

For more information, contact CBIA’s Bonnie Stewart at 860-244-1925 or bonnie.stewart@cbia.com.