Laura Kalick, JD, LLM, is director of nonprofit tax consulting at BDO in Bethesda, Maryland.
Organizations that have misclassified employees as independent contractors can set things right through the IRS Voluntary Classification Settlement Program. (Titled "Working Classes" in the print edition.)
Often an association will classify a worker as an independent contractor because he or she is a temporary hire, works part time, telecommutes, is an intern, or for some other reason. This may be the correct classification, but not always. Whether a worker is an employee or independent contractor depends on whether the organization receiving the services has the right to direct and control the worker as to how to perform the work. Important factors include whether the employer has behavioral and financial control and what type of relationship exists between the parties.
If an association misclassifies workers and is audited by the IRS, it may have to pay steep taxes, interest, and penalties. The Voluntary Classification Settlement Program (VCSP) is an IRS initiative whereby eligible organizations that have misclassified workers as independent contractors can voluntarily reclassify them as employees with limited federal employment tax liability for the past.
The VCSP may be an attractive program for associations with classification issues. To participate, the association must not be under examination by the IRS, a state government agency, or the U.S. Department of Labor, and it must have filed the required Forms 1099 for the misclassified workers for the previous three years. If an organization was previously audited, the organization must be in compliance with the audit's results.
How likely is it that an association's employment practices will be investigated? More likely than in the past. The federal government, believing that it is losing large sums of employment tax revenue because of worker misclassification, is in the third year of a program in which 500 tax-exempt organizations are examined each year to determine if workers have been correctly classified.
The IRS will use the results of the program to better identify organizations that may be misclassifying workers.
Before you decide to take part in the VCSP, consider the possible consequences. Most important, classifying a worker as an employee may give him or her rights in your benefit or pension plan.
Consult a qualified compensation and benefits expert before participating in this program.
Laura Kalick is an attorney and the national nonprofit tax consulting director with BDO USA, LLP, in Bethesda, Maryland. Email: [email protected]