Print Page   |   Your Cart   |   Sign In
News & Press: Tax Center

Reclassify Your Independent Contractors to Employees and Save

Monday, May 19, 2014   (0 Comments)
Posted by: Rhette Baughman
Share |

Having to add to payroll can be a momentous step for budding small businesses, but the tax implications can be burdensome.

By hiring employees, a small business owner is subject to payroll processing fees, extra paperwork with quarterly and annual filings, payment of payroll tax deposits, as well as the added cost of matching Social Security, Medicare and funding the federal unemployment fund (FUTA) as well as the state unemployment fund.

In an effort to ease the paperwork and monetary demands, many owners hire “independent contractors” instead. However, not every outside laborer is properly classified as such. The IRS has a set of rules governing the use of independent contractors and they will occasionally audit a business and reclassify some (or all) of the workers in this category to employees. At that point, the agency might go back three years to levy penalties, interest  and additional payroll taxes. It will share this information with the state taxing agencies who will add their share of payroll tax, penalties and interest. An experience like this could run a small business out of business.

Some business owners even play ball with independent contractors that don’t want to report their income from the activity and won’t issue a 1099. What the business owner may not realize is that when this happens, he is picking up on the tab on the worker’s taxes. He normally doesn’t declare the expense, and he therefore is paying a higher amount of income as well as self-employment tax. Even if he declares the expense, it will likely be disallowed in audit because a  1099 wasn’t issued.

You can save yourself the stress of this situation by complying with the tax laws. The IRS has initiated a program to help small businesses who voluntarily come forward for reclassification.

According to the IRS, “By prospectively reclassifying workers, making a minimal payment and meeting a few other requirements, eligible businesses can achieve greater certainty for themselves, their workers and the government.” The agency also claims more than 1,500 employers have applied to participate in the IRS Voluntary Classification Settlement Program (VCSP) since it was launched in September 2011.

According to the IRS, to be eligible for VCSP, an employer must:

  • Consistently have treated the workers in the past as nonemployees;
  • Have filed all required Forms 1099 for the workers for the previous three years;
  • Not currently be under audit for employment taxes by the IRS;
  • Not currently be under audit by the Department of Labor or a state agency on the classification of these workers. If either the IRS or Labor Department previously audited the employer on the classification of the workers, the employer must have complied with the results of the audit and not currently be contesting the classification in court.

You can apply for the program by filing IRS Form 8952. If you are accepted into the program, you will be required to pay in an amount effectively equaling just over 1% of the wages paid to the reclassified workers for the past year. When you consider the cost of an employee: matching Social Security and Medicare at 7.65%, FUTA tax at 0.8%, plus whatever your state charges you in payroll taxes, this is a considerable savings.

To determine if your workers are properly classified, check out the rules here:  IRS Guidelines to Independent Contractor of Employee

Originally posted at FOX Small Business Center. Written by Bonnie Lee.

Get $5k-$20 in Free Marketing: Make 2016 Your Year for Success!

In Business Magazine

Use In Business Magazine as a tool to reach your customers for 2016. Through Print, Online, Social Media, Email & Events, you can realize an additional $5k to $20k in free advertising with In Business Magazine over 2016.


Small is the New Black


What's trending for 2016? Small Business! This year, resolve to support our local economy by "Thinking Small" at least one time each week! Need help finding a small biz? Visit! #ThinkSmallBiz


Allowing you to concentrate on what's really important.

Low and Johnson Inc.

We understand the insurance needs of locally-owned businesses because we're one, too. As an ASBA member backed by CNA, we're dedicated to helping small businesses like yours safeguard all you've worked so hard to build.



ASBA 101


Date: Held monthly
Time: Click to check times
Location: Phoenix or Tucson


ASBA Speed Networking


Date: Every 2nd Tuesday of the Month
Time: 3:00 PM - 4:30 PM
Location: Phoenix or Tucson

You're important to us and we want to help protect you

Mutual of Omaha

Protecting you and your family through the use of insurance products. Purchase an insurance policy with lower premiums and/or enhanced benefits not available to the general public.


Have questions on small business and health insurance?

Health Insurance

Get the latest on individual, sole proprietor, or group plans related to small business. We can help you find the right plan for you, and your employees. Click to learn more!


CopperPoint Insurance Companies

CopperPoint Mutual

CopperPoint Insurance is Arizona's premiere provider of workers compensation insurance. We've been providing coverage and advocating for Arizona businesses, small and large, throughout the state since 1925.


Association Management Software Powered by YourMembership  ::  Legal