From Law Offices of David W. Klasing: Factors Used to Classify Workers as Employees vs. Independent Contractors, Federal Section 530 Relief, and the VCSP

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Tax Law Offices of David W. Klasing, PC

Oct 22, 2018, 16:36 ET

IRVINE, Calif., Oct. 22, 2018 /PRNewswire/ -- There are two types of workers: employees and independent contractors. Both provide services in exchange for compensation, but that is where the similarities end. Depending on whether a worker is classified as an employee or independent contractor, the employer will have different tax responsibilities under state and federal laws, notably the requirement to withhold and remit payroll taxes. In light of the immense payroll tax penalties, tax and interest that can result from worker misclassification – it's worth reviewing the Federal standards for classifying workers under a 20-factor test even though state law can significantly differ.

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The Internal Revenue Service (IRS) currently relies on three core standards for identifying workers properly: (1) the "behavioral control" test, (2) the "financial control" test, and (3) the "relationship of the parties" test which are analyzed under a "20 -factor test" which requires employers to assess:

Control over the order or sequence of work
Demands to perform full-time work
How compensation was provided
How much instruction workers received
How much training workers received
Requirements to perform services on the worksite
Requirements to submit reports
The continuity of the worker-employer relationship
The extent of the worker's ability to realize losses or profits
The extent to which a specific person performed services
The extent to which the services were integrated into the business
The flexibility of the worker's schedule
The level of control over assistants
Whether business expenses or travel expenses were covered
Whether the worker could be fired
Whether the worker could quit without assuming liability
Whether the worker had his or her own work facilities
Whether the worker provided services to multiple entities
Whether the worker's services were publicly available
Whether tools and materials were provided

Worker misclassification can lead to personal liability for those deemed "responsible parties". For instance, the IRS may impose a trust fund recovery penalty (TFRP), making the employer and those deemed responsible parties personally liable for the trust fund portion (employee portion) of the payroll taxes and employee income tax withholdings required.

Federal Section 530 Relief and the Voluntary Classification Settlement Program (VCSP)
To quote the IRS, which discusses Section 530 Relief and worker reclassification here, "Section 530 provides employers with relief from federal employment tax obligations if three statutory requirements are met: 1) reporting consistency; 2) substantive consistency; and 3) reasonable basis." So what does the IRS mean by "reporting consistency," "substantive consistency," and "reasonable basis"?

Reporting Consistency – The entity must have timely filed all Forms 1099 (Miscellaneous Income) and federal income tax returns that were required for the pertinent tax year(s).
Substantive Consistency – The entity must not have treated the worker ("or any worker holding a substantially similar position") as an employee after December 31, 1977.
Reasonable Basis – The entity must have treated the worker as an independent contractor on a "reasonable basis," which includes:

A previous tax audit
Established industry practices
Legal precedents (e.g. prior IRS or federal court rulings)
"Other reasonable basis"

In addition to Section 530 Relief, in 2011 the IRS introduced a program known as the Voluntary Classification Settlement Program (VCSP). The VCSP gives eligible entities "partial relief" from payroll taxes – but in exchange, requires participating entities to reclassify their workers appropriately. To apply for the VCSP, the taxpayer must submit Form 8952 (Application for Voluntary Classification Settlement Program (VCSP)).

See the full version of this article HERE

CONTACT: Dave Klasing, [email protected], https://klasing-associates.com/

SOURCE Tax Law Offices of David W. Klasing, PC