Relief Programs When Workers Are Misclassified

        Claiming you've always handled business matters in a certain way usually isn't an effective defense against IRS challenge. However, consistency can be an important defensive tool if you have always treated workers as independent contractors, and you fear that the IRS may now want to treat them as your employees for employment-tax purposes. A special safe-haven rule may prevent the IRS from reclassifying your workers as employees if you meet the following requirements:

Your business has never treated the workers in question as employees.

Your business has treated the workers in question as independent contractors on all of its federal tax returns—this includes filing Form 1099 information returns for these workers.

Your business has never treated anyone holding a substantially similar position to the workers in question as an employee for employment tax purposes after 1977.

Your business has a "reasonable basis" for not treating the workers in question as employees.

A "reasonable basis" for not treating workers as employees automatically exists if:

The IRS has audited your business and has never hit you with an employment-tax bill based on your treatment of anyone holding a substantially similar position to the workers in question;

A court decision or an IRS ruling specifically has said that similarly situated individuals were independent contractors rather than employees; or

A significant segment of the industry your business is in has historically treated similarly situated workers as independent contractors.

        Even if your business can't meet any of these three tests, it still may be able to prove some other reasonable basis for not treating the affected individuals as employees. Also, businesses that have filed returns, but that do not clearly meet the other safe-haven requirements, may be able to take advantage of a test program that allows the IRS to make a settlement offer. The exact amount that the IRS will ask for depends on the degree to which the safe-haven requirements are met. But a business that meets the reporting requirements and has a "colorable" argument that it meets the consistent treatment and reasonable basis tests, can expect to pay only 25 percent of its liability for one year. One trade-off is that the business has to agree to properly classify its workers in the future.

        If we can help you determine whether your business would qualify for relief, or find out if there are other ways to effectively insulate you from an expensive employment-tax problem, please give us a call.

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