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IRS Announces New Voluntary Worker Classification Settlement Program

The Internal Revenue Service announced last week a new program that will enable certain employers to voluntarily resolve worker classification issues rather than wait for an IRS audit.  The Voluntary Classification Settlement Program (VCSP) allows employers to voluntarily reclassify their workers from independent contractors to employees and make only a modest payment to cover past payroll taxes that would have been made had the nonemployees been treated as employees, with no interest or penalties due.  To be eligible, an employer must

  1. Consistently have treated the workers as nonemployees;
  2. Have filed all required Forms 1099 for the workers in the past three years; and
  3. Not currently be under audit by the IRS, the Department of Labor or a state agency concerning the improper classification of these workers.   

Employers should be aware: classifying a worker as an independent contractor instead of an employee can initially save money, but if the classification is incorrect, and the IRS or Department of Labor conducts an audit, an employer may face stiff penalties and interest.  The line between independent contractor and employee may be somewhat blurred, but the main inquiry in Indiana is the amount of control the company has over the worker.  The more control, the more likely the worker is an employee, not an independent contractor.  If you are interested in learning more about the VCSP or performing a self-audit to determine if your company has classified its employees correctly, please contact a lawyer in Bingham Greenebaum Doll's Labor and Employment Practice Group.

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