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Thursday, June 02, 2011
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The IRS in September launched a new program that will give a break to businesses who have improperly classified any of their employees as independent contractors.

Every business must classify its workers as either “employees” or “independent contractors,” and this classification has a long term   impact on the business.  Basically, “independent contractors” are different from “employees” because independent contractors   have contractual agreements to complete jobs and they have complete control over how they perform the job.   The decision to classify a worker as an “employee” or an “independent” contractor is critical.  Many employment statutes and regulations apply only to actual employees and not to independent contractors. Tough economic pressures can influence some business owners to classify workers as independent contractors, rather than employees, in an effort to save money on taxes, insurance, and other benefits offered employees.   However, a misclassification can prove extremely costly to a business.   Employers who misclassify their employees can be held liable for back payroll taxes, with interest, in addition to penalties.

The IRS sees this as an area of widespread abuse and, together with the Federal Department of Labor, has recently announced a crackdown effort that will have the cooperation of several state and federal agencies.  The good news for businesses occurred a week later, with the IRS announcement of the Voluntary Classification Settlement Program (VCSP), which in essence will allow employers to voluntarily correct any misclassification of an employee as an “independent contractor,” and be liable only for 10% of employment taxes for compensation paid for the most recent tax year, calculated under reduced rates, with no interest or penalties.   To learn more about this initiative, go to http://www.irs.gov/businesses/small/article/0,,id=246014,00.html

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