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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:
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:
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.
This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted.
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