IRS Targeting S Corporations for Worker Misclassification
The IRS has advised that it intends to audit more S corporations to identify worker misclassification issues.
In 2011, the IRS introduced its voluntary classification settlement program (VCSP) that allows employers to reclassify their workers as employees for employment tax purposes. By participating in this program, employers are allowed to treat their independent contractors or other non-employees as employees for all future tax periods. Participation in the VCSP requires employers to be subjected to minimal back taxes, but allows them to avoid interest and penalties on the employment tax liabilities they would have incurred for those employees.
Recently, a representative from the Small Business/Self-Employed Division of the IRS stated that it intends to audit S corporations that fail to classify their workers properly under the VCSP. According to the IRS, a corporate officer must always be classified as an employee, not an independent contractor, even if the officer is a part-time worker. By contrast, a member of a corporate board of directors may be classified as either an independent contractor or employee, depending on the specific facts or circumstances.
As recommended by the IRS, clients who provide 1099s and their tax professionals should confer to determine if the Forms 1099 recipients are independent contractors or employees under the VCSP.
What Does CohnReznick Think?
It is important to perform a thorough analysis to determine proper worker classification to determine if entering the VCSP is appropriate.
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