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Worker Classification: Is Your Business Tax Compliant?

04/22/2014  |  By: Jeff Drummonds, CPA, Shareholder, Chief Executive Officer- LBMC, PC


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The IRS has identified several issues of concern, including tip reporting, worker classification and the reporting of fringe benefits.

Workers' Classification

The IRS launched a voluntary classification settlement program (VCSP) in October 2012 for worker classification issues, and the program does not have an expiration date. So far, the IRS has received about 1,550 applications involving the classification of approximately 25,000 workers. Employers must agree to treat their workers as employees prospectively. In return, they receive audit protection for past years and make a payment just above 1 percent of compensation involved.

A temporary program allowed participation in the VCSP for employers who had not filed Forms 1099 for their workers for prior years. This has ended; the IRS is currently assessing whether to reinstate this program.

Tip reporting by employers

The IRS wants to educate employers so that they understand their tip-reporting responsibilities. Under Rev. Rul. 2012-18, I.R.B. 2012-26, 1032 and older guidance, a payment for service added to a bill is not a tip unless it meets several conditions, such as being free from compulsion and not required by the employer. If these conditions are not satisfied, the payment may be a service charge, which is treated as wages. Noncompliance is a problem, especially for many small businesses that are not aware of the issue.

Foreign workers in the United States

Lastly, another area of noncompliance involves foreign workers in the United States. There are documentation issues involving the type of visa held by the worker and the impact of tax treaties, among other things. There is a large gap in the information available on foreign workers, and company human resources departments need to be educated to provide information to payroll service companies, which are hired to determine the proper taxes and withholding.

If you have questions, or you are one of the companies being audited, seek the advice of your tax consultant. 

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Posted in: Financial Solutions, Tax
Tagged with: Business Tax