Clamping Down on Misclassification of Independent Contractors

The USDOL and IRS have teamed up in order to clamp down on employers misclassifying employees as independent contractors when they efile their tax informationin order to avoid employment taxes.In a press release on September 19, 2011 Secretary of Labor Hilda L. Solis announced  a memorandum of understanding with the Internal Revenue Service that will improve departmental efforts to end the business practice of misclassifying employees in order to avoid providing employment protections. The memorandum of understanding will enable the U.S. Department of Labor to share information and coordinate law enforcement with the IRS in order to level the playing field for law-abiding employers and ensure that employees receive the protections to which they are entitled under federal and state law.
“We’re here today to sign a series of agreements that together send a coordinated message: We’re standing united to end the practice of misclassifying employees,” said Secretary Solis. “We are taking important steps toward making sure that the American dream is still available for all employees and responsible employers alike.”
IRS Commissioner Doug Shulman said “This agreement takes the partnership between the IRS and Department of Labor to a new level. In this new phase of our relationship, we will work together more efficiently to address worker misclassification issues, and better serve the needs of small businesses and employees.”  
Business models that attempt to change, obscure or eliminate the employment relationship are not inherently illegal, unless they are used to evade compliance with federal labor laws — for example, if an employee is misclassified as an independent contractor and subsequently denied rights and benefits to which he or she is entitled under the law. In addition, misclassification can create economic pressure for law-abiding business owners.
In conjunction with this effort the IRS announced the Voluntary Classification Settlement Program (VCSP) that provides an opportunity for taxpayers to reclassify their workers as employees for employment tax purposes for future tax periods with partial relief from federal employment taxes. To participate in this new voluntary program, the taxpayer must meet certain eligibility requirements.
The VCSP is available for taxpayers who want to voluntarily change the prospective classification of their workers. The program applies to taxpayers who are currently treating their workers (or a class or group of workers) as independent contractors or other nonemployees and want to prospectively treat the workers as employees.
A taxpayer must have consistently treated the workers as nonemployees, and must have filed all required Forms 1099 for the workers to be reclassified under the VCSP for the previous three years to participate in VCSP. Additionally, the taxpayer cannot currently be under audit by the IRS and the taxpayer cannot be currently under audit concerning the classification of the workers by the Department of Labor or by a state government agency.
In addition a taxpayer participating in the VCSP will agree to prospectively treat the class or classes of workers as employees for future tax periods. In exchange, the taxpayer:

  • Will pay 10 percent of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year, determined under the reduced rates of section 3509(a) of the Internal Revenue Code. See VCSP FAQ 16, for information on how payment under the VCSP is calculated. Also see Instructions to Form 8952;
  • Will not be liable for any interest and penalties on the amount; and
  • Will not be subject to an employment tax audit with respect to the worker classification of the workers being reclassified under the VCSP for prior years.

A FAQ section is provided by the IRS and can be found by clicking this link VCSP Frequently Asked Questions. If you have been misclassifying ICs you can apply for this program through this application.
SHRM and employment attorneys alike feel that employers are likely to see and increase in enforcement efforts.
I have written on independent contractors several times. These include:
Independent Contractor: The Devil In Disguise
The IRS and HR: Who is an Employee?
Independent Contractor Problems May Arise With Current Employees
If you use independent contractors it is very important you TOTALLY UNDERSTAND the laws of classification. Otherwise it will cost you.

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