IRS Offering Employers Relief From Federal Payroll Taxes for Misclassified Workers

The Internal Revenue Service
recently issued Announcement 2011-64, establishing a new voluntary Worker Classification
Settlement Program. This program will enable employers to voluntarily
reclassify workers as employees if they were previously erroneously classified
as non-employees or independent contractors. In exchange, employers will be
obligated to make a minimal payment to cover past payroll tax
obligations. 

Under the program, employers
can obtain relief from all federal payroll taxes owed, as well as any
applicable interest and penalties resulting from the erroneous
misclassification. The employer must agree to treat such misclassified workers
as employees in the future, and also make a one-time payment to the IRS of
about one percent of the wages paid to the reclassified workers during the past
year. No interest or penalties will be due, and the employer will not be
audited on this basis for prior years.

In order to participate in the
program, an employer must (1) have consistently treated the workers in question
as nonemployees in the past, (2) have filed all required Form 1099s, and (3)
not currently be involved in an audit by any governmental agency concerning the
classification of these workers.  There is no set termination date of the
program, however the IRS encourages employers who wish to reclassify workers to
do so at least 60 days in advance. For those employers whose tax year is based
on a calendar year, that date would be November 1, 2011 for reclassifications
taking effect as of January 1, 2012.

It is clear that this program
will provide for significant tax relief from unpaid federal employment taxes
for employers who have previously misclassified workers.  However,
employers and their advisors should be cautious in deciding whether to move
forward with this new program. By participating in this program, employers are,
in effect, agreeing that those workers were misclassified in years past, but
that they will be treated as employees in the future. As a result, employers
could open themselves to other liabilities relating to the employer’s past
classification of the workers – for example, state payroll taxes, unemployment
taxes, workers compensation insurance, wage claims, overtime pay claims, and
claims for past and future employee benefits, such as health insurance or
pension benefits.

The determination of whether a worker should be reclassified as
an employee, and the potential impacts of such reclassification, should be
analyzed from both tax and employment law perspectives. If you have any
questions as to the proper classification of workers or would like to learn
more about this new program, please contact Robert P. Maloney at rmaloney@princelobel.com
or 617 456 8008, or Serge O. Bechade at sbechade@princelobel.com
or 617 456 8016 in the firm’s Corporate/Tax Practice Group,
or Daniel S. Tarlow in the firm’s Employment Practice Group at dtarlow@princelobel.com
or 617 456 8013.