IRS Program for Employers to Classify Workers Correctly

Last Reviewed/Updated 10/21/2015

Knowing the difference between an employee and an independent contractor – and correctly classifying their workers within these categories – can help employers avoid costly fines and audits from the IRS or the Department of Labor. The federal and State governments have made a priority of cracking down on employers that improperly classify workers as independent contractors instead of employees, whether due to an honest mistake or in a misguided attempt to avoid payroll taxes.

In September 2011, the IRS launched a program to allow many employers, including non-profits, to resolve past worker classification issues and come back into compliance by making a minimal payment covering past payroll tax obligations. The IRS made some adjustments to the program in December 2012.

To be eligible for the Voluntary Classification Settlement Program an applicant must:

  • Consistently have treated the workers as nonemployees in the past
  • Filed all required Forms 1099 for the workers for the previous three years
  • Not currently be under audit by the IRS, Department of Labor or a state agency concerning the classification of these workers. An employer who is being audited for reasons other than employment taxes may still be eligible. A taxpayer who was previously audited by the IRS or the Department of Labor concerning the classification of the class or classes of workers is eligible for the VCSP if the taxpayer has complied with the results of that audit and is not currently contesting the classification in court.

Full details are available on the Voluntary Classification Settlement Program Tax Page of IRS.gov and in Announcement 2012-45.

For more information about classifying workers properly visit:

Note about New Jersey’s independent contractor test: New Jersey law lays out a 3-pronged test (found at N.J.S.A. 43:21-19(i)(6)) to determine whether workers are employees or independent contractors. Known as the “ABC Test,” it provides that a worker is an employee unless:

a) The worker has been and will continue to be free from control or direction over the performance of services for the nonprofit;

b) The worker provides services that are outside the usual course of business of the nonprofit; and

c) The worker customarily engages in an independently established trade or business, occupation or profession.

Source: John J. Sarno, Esq., ed., Hiring, Firing & Risk Management: Employment Law for New Jersey Nonprofits, 3rd edition, Center for Non-Profit Corporations, 2007.

*All Center for Non-Profits members are also members of the National Council of Nonprofits. Not a member yet? Join today to support our advocacy, legal and management assistance activities, and access cost-saving opportunities!

 

The content of this article is for general informational purposes and does not constitute legal advice or a legal opinion. For answers to specific questions concerning your situation, you should consult a knowledgeable attorney who can advise you regarding your particular circumstances.