IRS Form 8952 - Voluntary Worker Classification Settlement Program - John R. Dundon II, Enrolled Agent
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IRS Form 8952 – Voluntary Worker Classification Settlement Program

Business Entity Selection and the Tax Consequences of Converting

IRS Form 8952 – Voluntary Worker Classification Settlement Program

I received an interesting call today from a small business employer who was reported to the IRS by a disgruntled past worker who claimed that he was paid as an independent contractor (and received IRS Form 1099) when in actuality he believed himself to be an employee (that should have received IRS Form W-2) for tax reporting purposes.

This prompted me to post about the new Voluntary Worker Classification Settlement Program. Having created well over 300 living wage jobs with benefits for people over the years I’ve grown to believe that most people roaming the planet today have no idea about the risks associated with that effort. The biggest risk in my opinion is associated with properly classifying workers as either employees subject to employment tax obligations or independent contractors whereby the worker is responsible for paying their own self employment tax. In the past the IRS has closed down the most well meaning business operations because improper worker classification created very large employment tax liabilities and heavily burdensome Trust Fund Recovery Penalties. The biggest risk I think is when a worker classified as an independent contractor gets injured on the job and doesn’t have his/her own insurance coverage or when a worker classified as an independent contractor becomes disgruntled and decides as a parting blow to report his/her ‘boss’ to the IRS or the US Treasury.

To alleviate that pain and mitigate some risk associated with one of thousands of decisions that job creators routinely make IRS Announcement 2011-64 gives businesses an opportunity to reclassify independent contractors as employees going forward.

IRS Form 8952 is used by businesses to apply for this reclassification opportunity. A business that applies for and is accepted into this program:

1) Receives audit protection backwards in connection with these reclassified workers,

2) Pays only 10% of the normal employer tax liability that may be due for the most recent tax year, and

3) Is not liable for interest and penalties on the amount.

In exchange the business gives IRS a six-year statute of limitation on the following three years’ employment taxes.

To be eligible:

1) The business cannot currently be under audit by IRS, the Department of Labor, or a state or local agency.  If the business has previously been audited, the business has to be currently complying with the directions of that audit.

2) The business must have consistently treated the workers as independent contractors.

3) The business must have filed all Forms 1099 for the prior years.



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