If you fear you’ve already inadvertently fallen out of compliance with worker classification rules, the IRS has a program that can help you out.
Under its Voluntary Classification Settlement Program (VCSP), a company that currently treats its workers (or a class or group of workers) as independent contractors or other nonemployees may voluntarily reclassify the workers as employees, rather than independent contractors, for future tax periods.
To qualify, you must have consistently treated the workers as nonemployees and have filed the required Forms 1099 for the preceding three years. You cannot currently be under an audit by the IRS, the Department of Labor or a state governmental agency. (Additional eligibility requirements may apply.)
If you qualify, your liability for past payroll obligations will be reduced to 10% of the employment tax liability that may have been due on compensation paid to the workers in question for the most recent tax year as determined under Section 3509 of the Internal Revenue Code.
More relevant than ever
Employee misclassification is even more relevant right now, given the recently upheld health care law and its potential penalties (starting in 2014) for not providing health care coverage to employees. Also bear in mind that state laws regarding employee / independent contractor status vary, and a worker could be classified one way for federal purposes and another for state purposes. Work with your tax advisor and attorney to determine whether you’re on safe ground.