The IRS has issued a fact sheet reminding employers it is important to correctly classify workers for purposes of federal employment taxes. Generally, employers must withhold income taxes, withhold and pay social security and Medicare taxes, and pay unemployment tax on wages paid to employees. Whether a worker is an employee or an independent contractor depends on a number of factors that fall into three categories: behavioral control, financial control and the type of relationship between the worker and the service recipient. An employer who is unsure of how to classify its workers after reviewing the control factors, can file a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.
There is no fee for requesting a worker classification determination. If an employer misclassifies employees as independent contractors without a reasonable basis for doing so, the employer may be liable for employment taxes, interest and penalties. However, an employer that has a reasonable basis for classifying its workers as independent contractors, may be entitled to special relief under section 530 of the Revenue Act of 1978 (P.L. 95-600). The IRS also has a Voluntary Classification Settlement Program, that provides taxpayers with an opportunity to reclassify their workers as employees for future tax periods for employment tax purposes with partial relief from federal employment taxes for eligible taxpayers that agree to prospectively treat their workers as employees. To participate in this voluntary program, the taxpayer must meet certain eligibility requirements, apply to participate in the VCSP by filing Form 8952, Application for Voluntary Classification Settlement Program, and enter into a closing agreement with the IRS. (IRS FS-2015-21, 2015FED ¶46,385, August 20 2015.)
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