By Rolando Garcia, CPA, JD, Tax Shareholder

When the Small Business Administration (SBA) opened the Paycheck Protection Program (PPP) application process on April 3, 2020, businesses across the nation reacted quickly to take advantage of the loan program. However, the PPP application process, which requires an applicant to ascertain its “payroll costs”, brought the common question of employee versus independent contractor to the forefront. Further reigniting the subject of worker classification was the recently issued guidance from the SBA, where the organization acknowledged that only workers classified as “employees” can be included as payroll for PPP loan purposes.

As a result, many employers are now questioning if they are correctly classifying their workers. For employers who feel they may have mischaracterized its worker classifications, there are a couple of  “amnesty” programs currently available to bring them to compliance.

Voluntary Classification Settlement Program (VCSP): Under this program, employers may voluntarily reclassify its workers as employees for employment tax purposes for future tax periods with partial relief from federal employment taxes. To participate, businesses must meet certain eligibility requirements and apply by filing Form 8952 with the Internal Revenue Service (IRS). Eligibility requirements include:

  • Employer must have consistently treated the workers to be reclassified as independent contractors or other nonemployees, including having filed all required Forms 1099 for the previous three years.
  • Employer cannot currently be under an employment tax audit by the IRS or under an audit concerning the classification of workers by the Department of Labor or by a state government agency.
  • If the IRS or Department of Labor has previously audited an employer concerning the classification of workers, the employer will be eligible only if they have complied the results of that audit and is not currently contesting the classification in court.

Once an employer has established eligibility to participate in the VCSP, it would agree to prospectively treat the class or classes of workers as employees for future tax periods. They would also agree to pay 10% of the employment tax liability that would have been due on compensation paid to the workers for the most recent tax year. Additionally, the employer would not be liable for any interest and penalties on the amount and not be subject to an employment tax audit with respect to the work classification of the workers being reclassified under the VCSP for prior years.

Classification Settlement Program (CSP): This program was designed to allow businesses with an open employment tax examination to settle a tax debt owed due to misclassifying employees as independent contractors. Under the CSP, IRS examiners are required to offer employers a worker classification settlement if they have timely filed information returns consistent with its treatment of the worker as a nonemployee, such as Forms 1099, and if they have not been suspected of committing fraud.

Under CSP, there are three graduated settlements available to employers based on how they meet the IRS’ Section 530 (which is a safe harbor potentially providing employers with relief from the reclassification of individuals as employees and the corresponding federal employment tax liabilities) relief requirements:

  1. 100% Offer: For employers who meet the Section 530 reporting consistency requirement, but do not meet the substantive consistency requirement or reasonable basis test, the offer is a full employment tax adjustment for the most recent year under examination.
  2. 25% Offer: If the employer meets the Section 530 reporting consistency requirement and has a logical argument that meets the substantive consistency requirement and/or the reasonable basis test, the offer is 25% of the most recent year under examination.
  3. No Assessment: If all three requirements of Section 530 are satisfied, but the employer nonetheless wishes to enter into an agreement, they may simply begin reclassifying their workers.

CSP agreements are closing agreements that bind the service and the employer to prospective worker classification for future periods. Therefore, it’s important that CSP agreements be reviewed by a tax advisor like those at Doeren Mayhew who have experience in resolving worker classification issues.

For assistance in determining the appropriate worker classification for your employees or to further explore these amnesty programs, contact Doeren Mayhew’s dedicated Tax Group today.