It is a known fact that millions of workers are misclassified by employers are independent contractors when reality, they are actually employees. This problem deprives the federal government of huge sums of tax revenue because of underreporting income and related unpaid employment taxes. In order to combat this problem, the IRS has established a few ways in which to correctly classify workers.
Voluntary Classification Settlement Program
The voluntary classification settlement program is a program designed to provide relief to eligible employers that voluntarily reclassify workers as employees for federal government tax purposes similar to that obtained under the Classification Settlement Program.
In order to participate in the voluntary classification settlement program, an employer must have consistently treated workers as independent contractors and filed Form 1099 for their workers for the previous three years.
In order to apply for the program, an employer must file Form 8952 (Application for Voluntary Classification Settlement Program) 60 days before they wish to start classifying their workers are employees instead of independent contractors.
Other Worker Classification Initiatives
The IRS also has other ways of changing workers from independent contractors to employees, these include:
1. National Research Program Employment Audits – The IRS launched this initiative in 2010 to gather data on worker classification, fridge benefits, and officer’s compensation. There are generally about 2,000 audits each year that involve all types of employers ranging from large and small. In most cases, the audit will continue even if the employer qualifies for Section 530 relief.
2. Electronic Matching – The IRS has a 1099 matching program that and determine if a worker’s income comes from a single 1099-MISC form. The IRS is always concerned with income that has come from one source and will generally be very careful not to overlook anything. If the return is in fact audited, agents may refer the case to the employment tax examination group to check that the business is properly classifying workers.
3. Questionable Employment Tax Practices – The IRS has the ability to share data with most state workforce agencies in order to find red flags that may indicate misclassification of workers.
4. State Reverse File Match Initiative Program – The IRS receives information from state tax authorities relating to income tax withholdings in order to match their information with the information recorded at the IRS.
5. Department of Labor Coordinated Investigations – The Department of Labor shares information with the IRS in order to coordinate its efforts with dealing with violations of the Fair Labor Standards Act.
6. Form SS-8 and Form 8919 – The IRS will review filings of Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) and Form 8919 (Uncollected Social Security and Medicare Tax on Wages) in order to find any discrepancies in the information on the forms.
The IRS use a combination of these means in order to catch employers that are not classifying their workers properly.