Business Law Question

to address it as the consequences of failure to do so can be financially devastating to thecompany. There are currently a few different methods to address a possible workerclassification issue:1. Do nothing and hope for the best. If examined attempt to fall under theClassification Settlement Program.2. Make modifications to classification on a going forward basis but not advise theIRS of the change (stealth change) and hope for the best.3. Attempt to fall under Section 530 relief provisions.4. Enter the Voluntary Classification Settlement Program.Below you will find a set of facts with respect to Miami Business Services, Inc. In Addition,an employee census is provided as well as a completed form SS_8, “Determination ofWorker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.”You are to write a memorandum to answer question#1, no more than 3 pages.You have been asked to write a memorandum to Miami Business Services, a new client, toadvise them of the best course of action with respect to correcting the worker classificationissue that has arisen. Your memo should cover:1. Does the company have a worker classification issue? If so, describe why.2. Which of the workers are subject to reclassification as employees?3. What are the available options?4. Which option do you recommend and why do you feel it is superior to otheroptions?5. What are the requirements to qualify for the recommended option?6. Based on the option you choose, what needs to be done going forward, if anything?7. In making your recommendation you should consider not only the current cost but theongoing cost of your recommendation.FACTS:Miami Business Services, Inc. (MBS) is a Florida corporation that was formed in 2013. Thesole shareholder and officer is Ronald M. Donald. MBS is in the consulting business. It has49 employees. A census of employees for 2020 with 2019 data appears on a scheduleattached below:MBS has treated some workers as employees and others as “independent contractors.”The sales- consultant independent contractors, in many cases, provided the same servicesthat the sales- consultant employees provided.In June 2020 one of the MBS independent contractors (IC) asked to be classifiedas an employee. Ronald responded that he could not afford to do so and if the IC wantedto work for the company, he would accept his status as an independent contractor. As aside note, workers who were classified as ICs were required to sign a statement that theywere independent contractors and understood and agreed to that status as well as wouldbe responsible for their own taxes. Also, some of the ICs were provided timely 1099swhich reported their income as other compensation (see employee census).2This had been Ronald’s practice since forming MBS.The employee believed that MBS was in fact profitable because one of its regularcustomers was a company controlled by the country of North Kim and Ronald drove alate model Mercedes. The IC was told by a friend of his that the friend’s company hadbeen examined by IRS and that the friend was reclassified from being an independentcontractor to an employee by IRS. The friend also confided that he had heard that one ofthat company’s independent contractors had blown the whistle on the company andreceived “big bucks” from IRS. The IC immediately reported it to IRS. The IRSrepresentative provided the IC with a form SS-8 to complete and submit (see attached).The IC showed the SS-8 to Ronald and was immediately fired.ADDITIONAL FACTS:1. The company is not currently under examination by the IRS nor the State.2. The workers who were treated as independent contractors were always treated assuch.3. The forms W-2 or 1099s were issued or not issued as shown on the attachedworker’s census.4. At the time MBS was started Ronald had checked around with other consultancycompanies (in the same general industry) in the area and found that these companieshad treated their sales- consultants for the most part as independent contractors.Ronald never did a formal study to confirm what he was able to determine by makingcalls to friends in the same business Question 1: Worker Classification
In general, when a worker classification problem arises a company needs to decide on how
to address it as the consequences of failure to do so can be financially devastating to the
company. There are currently a few different methods to address a possible worker
classification issue:
1.
2.
3.
4.
Do nothing and hope for the best. If examined attempt to fall under the
Classification Settlement Program.
Make modifications to classification on a going forward basis but not advise the
IRS of the change (stealth change) and hope for the best.
Attempt to fall under Section 530 relief provisions.
Enter the Voluntary Classification Settlement Program.
Below you will find a set of facts with respect to Miami Business Services, Inc. In Addition,
an employee census is provided as well as a completed form SS_8, “Determination of
Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.”
You are to write a memorandum to answer question#1, no more than 3 pages.
You have been asked to write a memorandum to Miami Business Services, a new client, to
advise them of the best course of action with respect to correcting the worker classification
issue that has arisen. Your memo should cover:
1.
2.
3.
4.
5.
6.
7.
Does the company have a worker classification issue? If so, describe why.
Which of the workers are subject to reclassification as employees?
What are the available options?
Which option do you recommend and why do you feel it is superior to other
options?
What are the requirements to qualify for the recommended option?
Based on the option you choose, what needs to be done going forward, if anything?
In making your recommendation you should consider not only the current cost but the
ongoing cost of your recommendation.
FACTS:
Miami Business Services, Inc. (MBS) is a Florida corporation that was formed in 2013. The
sole shareholder and officer is Ronald M. Donald. MBS is in the consulting business. It has
49 employees. A census of employees for 2020 with 2019 data appears on a schedule
attached below:
MBS has treated some workers as employees and others as “independent contractors.”
The sales- consultant independent contractors, in many cases, provided the same services
that the sales- consultant employees provided.
In June 2020 one of the MBS independent contractors (IC) asked to be classified
as an employee. Ronald responded that he could not afford to do so and if the IC wanted
to work for the company, he would accept his status as an independent contractor. As a
side note, workers who were classified as ICs were required to sign a statement that they
were independent contractors and understood and agreed to that status as well as would
be responsible for their own taxes. Also, some of the ICs were provided timely 1099s
2
which reported their income as other compensation (see employee census). This had
been Ronald’s practice since forming MBS.
The employee believed that MBS was in fact profitable because one of its regular
customers was a company controlled by the country of North Kim and Ronald drove a
late model Mercedes. The IC was told by a friend of his that the friend’s company had
been examined by IRS and that the friend was reclassified from being an independent
contractor to an employee by IRS. The friend also confided that he had heard that one of
that company’s independent contractors had blown the whistle on the company and
received “big bucks” from IRS. The IC immediately reported it to IRS. The IRS
representative provided the IC with a form SS-8 to complete and submit (see attached).
The IC showed the SS-8 to Ronald and was immediately fired.
ADDITIONAL FACTS:
1.
2.
3.
4.
The company is not currently under examination by the IRS nor the State.
The workers who were treated as independent contractors were always treated as
such.
The forms W-2 or 1099s were issued or not issued as shown on the attached
worker’s census.
At the time MBS was started Ronald had checked around with other consultancy
companies (in the same general industry) in the area and found that these companies
had treated their sales- consultants for the most part as independent contractors.
Ronald never did a formal study to confirm what he was able to determine by making
calls to friends in the same business.
3
5
6
Wangdoodle Frobash
7
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Checkpoint Contents
Federal Library
Federal Editorial Materials
Practice Aids
Client Letters
Sample Client Alert Letters
1113 Client Letter: IRS’s Voluntary Classification Settlement Program for misclassified workers
¶1113 Client Letter: IRS’s Voluntary Classification Settlement Program for
misclassified workers
To the practitioner: For information on the Voluntary Classification Settlement Program, see Federal Tax Coordinator ¶
H-4282.1 . For background information on worker classification, see Federal Tax Coordinator ¶ H-4251 et seq. For client
letters on the classification of workers as employees or independent contractors, see ¶1112 and ¶2123 .
Dear Client:
I’m writing to tell you about an employment tax settlement program offered by IRS—the Voluntary Classification Settlement
Program (VCSP). This program allows employers to reclassify as employees those workers they have erroneously treated
as independent contractors. The program has generous payment terms, and participants get relief from employment tax
audits for previous years. Here are the details.
Employee or independent contractor? Whether a worker is classified as an employee or as an independent contractor
makes a big difference for federal income tax and employment tax purposes. If a worker is an employee, the employer must
withhold federal income tax and FICA taxes on the employee’s wages, pay the employer’s share of FICA taxes and the FUTA
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tax, and often provide the worker with fringe benefits it makes available to other employees. There may be state tax
obligations as well.
None of those obligations apply for workers who are independent contractors. Instead, the business merely sends the
independent contractor a Form 1099-NEC for the year showing what he was paid (if it amounts to $600 or more).
In general, individuals are generally employees if the enterprise they work for has the right to control and direct them
regarding the job they are to do and how they are to do it. Otherwise, the individuals are independent contractors.
Because the stakes are high, the issue is often hotly contested between taxpayers and IRS. The VCSP will allow employers to
resolve past worker classification issues by voluntarily reclassifying their workers without undergoing an audit.
Who is eligible. The VCSP is available to taxpayers who have consistently treated their workers (or a class or group of their
workers) as independent contractors and now want to begin treating them as employees. To be eligible, the taxpayer must
have filed all required Forms 1099 for the workers for the previous three years within six months of the Form 1099 due dates
(including extensions).
A taxpayer who is currently under an IRS employment tax audit isn’t eligible for the program. Likewise, a taxpayer who is
under audit for worker classification issues by the IRS, the Department of Labor (DOL) or a state government agency is
ineligible. However, a taxpayer that was previously audited by IRS or the DOL for worker classification is eligible if it has
complied with the results of that audit.
A taxpayer doesn’t lose eligibility for the program by having been contacted by IRS for information based on one of their
workers filing a Form SS-8 with IRS requesting a determination of whether the worker is an employee or independent
contractor. The VCSP is still available, since the SS-8 determination process isn’t an audit.
If a corporate taxpayer’s parent, subsidiary, or other member of its consolidated group is under audit, then the taxpayer can’t
participate in the VCSP. An audit of one member of a taxpayer’s consolidated group is treated as an audit of the taxpayer for
these purposes.
Terms of the program. A taxpayer who is accepted into the VCSP must agree to treat the class of workers as employees for
future tax periods. The taxpayer must also agree to allow IRS an extra three years to assess employment taxes. This
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extension applies for the first three calendar years beginning after the agreement takes effect.
In exchange for making these concessions, the taxpayer gets the following benefits:
The taxpayer must pay only 10% of the employment tax liability on compensation paid to the workers for the most recent
tax year, determined under reduced rates (see “Figuring the payment due,” below).
The taxpayer won’t be liable for any interest and penalties on the employment taxes.
The taxpayer won’t be subject to an employment tax audit for the classification of the workers for prior years.
Taxpayers may choose to reclassify some or all of their workers. However, once a taxpayer chooses to reclassify certain
workers as employees, it must treat all workers in the same class as employees. For example, suppose that a construction
firm currently contracts with its drywall installers, electricians, and plumbers to perform services at construction sites. It
wants to voluntarily reclassify its drywall installers as employees. Once the VCSP closing agreement is signed, the company
must treat all drywall installers as employees for employment tax purposes.
Figuring the payment. The payment due under the VCSP is 10% of the employment taxes, calculated under reduced rates, on
the compensation paid to the reclassified workers in the most recently completed tax year, determined at the time the VCSP
application is filed.
If you apply for the VCSP in 2024, the most recently completed tax year will be 2023. The reduced rate is 10.68% of
compensation up to $160,200 (the social security wage base for 2023) and 3.24% of compensation above $160,200. You’ll pay
only 10% of that amount.
Illustration: A company (a calendar-year taxpayer) paid $2 million in 2023 to workers that are the subject of a VCSP
application. None of the workers were paid more than $160,200 in wages.
The company submits its application on Oct. 1, 2024. It wants to begin treating the workers as employees on Jan. 1,
2025. The company calculates the payment due based on amounts paid to the workers in 2023, because 2023 was the
most recently completed tax year when the application was filed.
Under the reduced rates, the employment taxes on $1.5 million of wages would be $213,600 (10.68% of $2 million). The
company’s VCSP payment would be 10% of $213,600, or $21,360.
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Procedure. Taxpayers apply to participate in the VCSP by filing Form 8952 with IRS at least 60 days before the date they want
to begin treating the workers as employees. No payment should be made at that time. After IRS reviews the application, it will
contact the taxpayer, or the taxpayer’s authorized representative, to complete the process.
Taxpayers who are accepted into the VCSP must enter into a closing agreement with IRS. Full payment is due when the
taxpayer returns the signed closing agreement to IRS.
Should you participate in the VCSP? Although the VCSP’s terms are generous, any decision to participate in the program
should be made carefully, after weighing the costs and benefits. Agreeing to treat workers as employees may have farreaching consequences under a variety of federal and state statutes. The right choice may depend on how clear it is that the
workers are in fact employees.
I’m available to discuss with you the pros and cons of participating in the VCSP in your specific situation. Please call my
office to arrange for an appointment. If participation is right for you, I can help you in filing an application and negotiating a
closing agreement.
Very truly yours,
END OF DOCUMENT –
© 2024 Thomson Reuters/Tax & Accounting. All Rights Reserved.
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Checkpoint Contents
Federal Library
Federal Editorial Materials
Practice Aids
Client Letters
Sample Client Alert Letters
1113 Client Letter: IRS’s Voluntary Classification Settlement Program for misclassified workers
¶1113 Client Letter: IRS’s Voluntary Classification Settlement Program for
misclassified workers
To the practitioner: For information on the Voluntary Classification Settlement Program, see Federal Tax Coordinator ¶
H-4282.1 . For background information on worker classification, see Federal Tax Coordinator ¶ H-4251 et seq. For
client letters on the classification of workers as employees or independent contractors, see ¶1112 and ¶2123 .
Dear Client:
I’m writing to tell you about an employment tax settlement program offered by IRS—the Voluntary Classification Settlement
Program (VCSP). This program allows employers to reclassify as employees those workers they have erroneously treated as
independent contractors. The program has generous payment terms, and participants get relief from employment tax audits
for previous years. Here are the details.
Employee or independent contractor? Whether a worker is classified as an employee or as an independent contractor
makes a big difference for federal income tax and employment tax purposes. If a worker is an employee, the employer must
withhold federal income tax and FICA taxes on the employee’s wages, pay the employer’s share of FICA taxes and the FUTA
https://checkpoint.riag.com/app/view/toolItem?usid=51fa8bj1dd207&cmpType=MAIN&feature=tfederal&lastCpReqId=51761&searchHandle=CMPST.609
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tax, and often provide the worker with fringe benefits it makes available to other employees. There may be state tax
obligations as well.
None of those obligations apply for workers who are independent contractors. Instead, the business merely sends the
independent contractor a Form 1099-NEC for the year showing what he was paid (if it amounts to $600 or more).
In general, individuals are generally employees if the enterprise they work for has the right to control and direct them
regarding the job they are to do and how they are to do it. Otherwise, the individuals are independent contractors.
Because the stakes are high, the issue is often hotly contested between taxpayers and IRS. The VCSP will allow employers to
resolve past worker classification issues by voluntarily reclassifying their workers without undergoing an audit.
Who is eligible. The VCSP is available to taxpayers who have consistently treated their workers (or a class or group of their
workers) as independent contractors and now want to begin treating them as employees. To be eligible, the taxpayer must
have filed all required Forms 1099 for the workers for the previous three years within six months of the Form 1099 due dates
(including extensions).
A taxpayer who is currently under an IRS employment tax audit isn’t eligible for the program. Likewise, a taxpayer who is
under audit for worker classification issues by the IRS, the Department of Labor (DOL) or a state government agency is
ineligible. However, a taxpayer that was previously audited by IRS or the DOL for worker classification is eligible if it has
complied with the results of that audit.
A taxpayer doesn’t lose eligibility for the program by having been contacted by IRS for information based on one of their
workers filing a Form SS-8 with IRS requesting a determination of whether the worker is an employee or independent
contractor. The VCSP is still available, since the SS-8 determination process isn’t an audit.
If a corporate taxpayer’s parent, subsidiary, or other member of its consolidated group is under audit, then the taxpayer can’t
participate in the VCSP. An audit of one member of a taxpayer’s consolidated group is treated as an audit of the taxpayer for
these purposes.
Terms of the program. A taxpayer who is accepted into the VCSP must agree to treat the class of workers as employees for
future tax periods. The taxpayer must also agree to allow IRS an extra three years to assess employment taxes. This
https://checkpoint.riag.com/app/view/toolItem?usid=51fa8bj1dd207&cmpType=MAIN&feature=tfederal&lastCpReqId=51761&searchHandle=CMPST.609
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extension applies for the first three calendar years beginning after the agreement takes effect.
In exchange for making these concessions, the taxpayer gets the following benefits:
The taxpayer must pay only 10% of the employment tax liability on compensation paid to the workers for the most recent
tax year, determined under reduced rates (see “Figuring the payment due,” below).
The taxpayer won’t be liable for any interest and penalties on the employment taxes.
The taxpayer won’t be subject to an employment tax audit for the classification of the workers for prior years.
Taxpayers may choose to reclassify some or all of their workers. However, once a taxpayer chooses to reclassify certain
workers as employees, it must treat all workers in the same class as employees. For example, suppose that a construction
firm currently contracts with its drywall installers, electricians, and plumbers to perform services at construction sites. It
wants to voluntarily reclassify its drywall installers as employees. Once the VCSP closing agreement is signed, the company
must treat all drywall installers as employees for employment tax purposes.
Figuring the payment. The payment due under the VCSP is 10% of the employment taxes, calculated under reduced rates, on
the compensation paid to the reclassified workers in the most recently completed tax year, determined at the time the VCSP
application is filed.
If you apply for the VCSP in 2024, the most recently completed tax year will be 2023. The reduced rate is 10.68% of
compensation up to $160,200 (the social security wage base for 2023) and 3.24% of compensation above $160,200. You’ll pay
only 10% of that amount.
Illustration: A company (a calendar-year taxpayer) paid $2 million in 2023 to workers that are the subject of a VCSP
application. None of the workers were paid more than $160,200 in wages.
The company submits its application on Oct. 1, 2024. It wants to begin treating the workers as employees on Jan. 1,
2025. The company calculates the payment due based on amounts paid to the workers in 2023, because 2023 was the
most recently completed tax year when the application was filed.
Under the reduced rates, the employment taxes on $1.5 million of wages would be $213,600 (10.68% of $2 million). The
company’s VCSP payment would be 10% of $213,600, or $21,360.
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Procedure. Taxpayers apply to participate in the VCSP by filing Form 8952 with IRS at least 60 days before the date they want
to begin treating the workers as employees. No payment should be made at that time. After IRS reviews the application, it will
contact the taxpayer, or the taxpayer’s authorized representative, to complete the process.
Taxpayers who are accepted into the VCSP must enter into a closing agreement with IRS. Full payment is due when the
taxpayer returns the signed closing agreement to IRS.
Should you participate in the VCSP? Although the VCSP’s terms are generous, any decision to participate in the program
should be made carefully, after weighing the costs and benefits. Agreeing to treat workers as employees may have farreaching consequences under a variety of federal and state statutes. The right choice may depend on how clear it is that the
workers are in fact employees.
I’m available to discuss with you the pros and cons of participating in the VCSP in your specific situation. Please call my
office to arrange for an appointment. If participation is right for you, I can help you in filing an application and negotiating a
closing agreement.
Very truly yours,
END OF DOCUMENT –
© 2024 Thomson Reuters/Tax & Accounting. All Rights Reserved.
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