|
When a worker is properly classified as an employee, the employer must pay social security tax of 6.20% and Medicare tax of 1.45% of gross wages. On top of these amounts, the employer is generally obligated to also pay workers’ compensation insurance and federal and state unemployment tax (generally 3 to 4% for a new employer). Assuming that the work comp premiums are 15% of gross wages, the total burden rate is 26.65% of gross wages, before applying the cost of employee benefits, for the privilege of being an employer. It is no wonder that so many employers are attempting to classify workers as independent contractors in any environment, but especially in the current economic environment. The consequences of improper classification can be significant and potentially retroactive. The initial determination of whether a worker is an employee or an independent contractor comes down to whether the company directs and controls the worker. If the answer is yes, then most likely that worker is an employee. The IRS developed a 20 factor “test” to assist companies in determining the proper classification of a worker and that “test” includes such topics as the level of instruction and training provided by the company to the worker, the flexibility or lack of flexibility of the worker’s schedule and a company’s demand for full-time work. The IRS also allows a company or a worker to file Form SS-8 for an IRS determination of worker classification. The IRS believes that workers often file SS-8 to challenge their own treatment as an independent contractor by a company. If a regulatory agency reclassifies an independent contractor as an employee, a number of issues and questions are presented. At a minimum, the IRS will charge an employer for back taxes, interest and penalties. The interest and penalties can be significant, especially since the taxes should have been paid on a quarterly basis in a prior year or years. If the reclassification determination is retroactive to a prior year, the question comes up as to whether the employee should have been covered by the company health and retirement plans? What if the employee experienced a significant illness while previously classified as an independent contractor and not covered by the plan? Can that employee now file a claim for reimbursement and what happens to the matching contributions in the company’s 401(k) plan that the employee would have been entitled to receive in prior years? Voluntary Classification Settlement Program The VCSP allows employers to resolve prior worker classification issues before an audit. The VCSP includes an incentive in the form of reduced taxes and no penalties and interest for employers who voluntarily reclassify workers pursuant under the VCSP. An employer must satisfy the following three requirements to be eligible for VSCP: - Employer must have consistently treated the workers as non employees
- Employer must have filed all required Forms 1099 for the workers for the previous three years
- Employer must not be currently under audit by the IRS, DOL or a state agency regarding the proper classification of workers.
Application to the program is made by completing and filing Form 8952 and satisfying the following three requirements: a) agreeing to prospectively treat its workers or a class or group of workers as employees for federal employment tax purposes, b) agreeing to pay ten percent of the employment tax liability that would have been due based of the employee’s compensation for the most recent tax year, and c) agreeing to extend the period of limitations on assessment of employment taxes. Advice and Consultation For further advice and consultation on this topic, please contact Human Resources, Inc. at 727-895-4700 or rightchoice@HRinc.com. Human Resources, Inc. a Human Resource Management company offers payroll services, HR management, employee leasing, retirement plan services, medical and supplemental insurance administration and PEO services. If you have any query or question feel free to contact at http://www.humresources.com/ or call for 727-895-4700
Related Articles -
HR management company Florida, human resources consulting, HR consulting group Florida, HR consulting firms Florida, HR management company,
| 
