California Labor &
Employment Law Blog
Oct 3, 2011

IRS Introduces Partial Amnesty Program for Independent Contractor Misclassification

Topics: Legal Information, New Laws & Legislation, Wage & Hour Issues

On September 21, 2011 the Internal Revenue Service introduced the Voluntary Worker Classification Settlement Program that offers employers the opportunity to gain certainty regarding potential past federal tax liability associated with misclassifying workers as independent contractors.  The Program allows employers to voluntarily reclassify workers that were improperly classified as independent contractors into employees and pay a minimal payment (federal payroll taxes, interest and penalties) to cover past federal payroll tax obligations for the contractor-turned-employee. 

To be eligible for the Program, an employer must:

(1) Consistently have treated the workers in the past as nonemployees,
(2) Have filed all required Forms 1099 for the workers for the previous three years, and
(3) Not currently be under audit by the IRS, the Department of Labor or a state agency concerning the classification of these workers.

With the federal and state authorities increasing their enforcement in this area, the primary benefit of this Program is that it allows employers that believe they may have missclassified workers as independent contractors to be assured, by paying the minimal amount to the IRS (10% of the back payroll taxes owed), that they will have not have any further past federal tax liability.

There are, however, significant risks with using this Program.  This program is not a complete amnesty program.  There are many areas where an employer can be liable when it misclassifies employees as independent contractors other than federal payroll taxes.  This Program only provides relief for federal payroll taxes.  Participation in this Program would still leave the employer with potential liability to state taxing agencies, the employer's workers' compensation carrier, and directly to the misclassified worker.  In fact, using this Program and then reclassifying the workers as independent contractors may alert the state agencies to the possibility of liability for unpaid state payroll taxes and unemployment contributions.  If your workers' compensation carrier becomes aware of the misclassification it can seek payment for past unpaid workers' compensation insurance premiums under the theory that the workers should have been on the payroll used to calculate the amount of the premiums.  The reclassification of the workers may also alert them to potential recovery on a variety of issues, including but not limited to unpaid overtime, missed meal and rest breaks and unpaid employee benefits that they did not receive during the time period they were misclassified (such as retirement/pension benefits, stock options, health insurance, and vacation).  Moreover, using this Program may be seen as an admission that, in fact, the workers were not independent contractors, thereby making it easier for the state agencies and individual employees to pursue these potential damages.  Finally, the Program includes a provision whereby the employer is subject to future payroll tax audits from the IRS for a six year period as opposed to the normal three year statute of limitations.

Although the Voluntary Worker Classification Settlement Program offers certainty regarding past federal taxes, use of the Program could lead to other issues.  We recommend that employers think carefully about the risks to their workforce before using this Program and consult with competent attorneys and/or tax advisors before doing so.

About CDF

For over 25 years, CDF has distinguished itself as one of the top employment, labor and immigration firms in California, representing employers in single-plaintiff and class action lawsuits and advising employers on related legal compliance and risk avoidance. We cover the state, with five locations from Sacramento to San Diego.

> visit primary site

About the Editor in Chief

Sacramento Office Managing Partner and Chair of CDF’s Traditional Labor Law Practice Group. Mark has been practicing labor and employment law in California for thirty years. His practice has a special emphasis on the representation of California employers in union-management relations and handling federal and state court litigation and administrative matters triggered by all types of employment-related disputes. He is also adept at providing creative and practical legal advice to help minimize the risks inherent in employing workers in California. He recently named “Sacramento Lawyer of the Year” in Employment Law-Management for 2021 by Best Lawyers®.
> Full Bio   > Email   Call 916.361.0991

CDF Labor Law LLP © 2021

Editorial Board About CDF What We Do Contact Us Attorney Advertising Disclaimer Privacy Policy Cookie Policy