Change from 1099 to W2 Required? Explore This Safe Harbor Relief in More Detail

Are you the subject of an IRS audit? Despite the fact that we all know this is terrible, what would happen if the IRS determined that many of your 1099 independent contractors were actually W-2 employees?

Section 530’s safe-harbor provisions could be useful.

Article 530

You must comply with the following requirements to be eligible for safe harbor relief under Section 530:

  1. Consistency in Reporting: Timely and consistent reporting of federal tax returns (1099s) to all employees you accurately classified as contractors. For instance, you have to file Form 1099 for a worker if you paid them more than $600.
  2. Substantive Consistency: Independent contractors, as well as any other comparable workers, must have been handled as non-employees. As an illustration, if your sister-in-law performs the exact same work as your independent contractor while working for you as an employee, she must likewise be treated as one.
  3. Reasonable Basis: You must demonstrate that your decision to treat your employees as independent contractors was justified. As an illustration, you relied on the counsel of a business attorney or accountant who was familiar with the specifics of your industry.

Let’s say you are not granted Section 530 safe harbor relief. Consequently, the IRS Voluntary

You may be able to settle your tax liability for overdue payroll taxes through the Classification Settlement Program (VCSP).

How to get assistance from the Voluntary Classification Settlement Program (VCSP) if you don’t meet the requirements for Section 530

A significant percentage of your past federal employment taxes will be forgiven by the IRS under the VCSP, and you will reclassify your independent contractors as employees for future tax seasons. The employment taxes for the most recent year are only 10% of what you owe, and best of all, there are no interest or penalties!

To be eligible, you must:

  1. Right now, you handle your employees more like independent contractors than like employees.
  2. You’ve treated your employees and employees who perform comparable jobs as non-employees.
  3. Prior to completing Form 8952, all 1099s for your employees from the previous three years must have been filed.

Meeting these conditions is crucial because, once you do, the VCSP enables you to be eligible for Section 530 safe harbor protection. For federal employment tax reasons, you might still treat those people as independent contractors even if the IRS determines that you misclassified them as employees, which makes Section 530 preferable for you than VCSP. This indicates that while under the VCSP you are only required to pay back 10% of a year’s worth of employment taxes. You won’t have to reclassify your independent contractors as employees thanks to Section 530, which will also save you thousands in employment taxes that you would have had to pay under the VCSP.

You cannot be: According to the VCSP requirements, you cannot be:

  1. Regarding the employee status of your potential employees in an IRS dispute
  2. During an IRS audit of employment taxes.
  3. Under a categorization exam for personnel conducted by a state or federal agency.
  4. Any of these governmental organizations have previously scrutinized how you classify your staff.

Form 8952 must be used to apply for VCSP; it may be submitted at any time, although it is recommended that you wait at least 60 days before treating your employees as such.

Things to keep in mind

  • If you are eligible for the VCSP, you must submit 1099 forms to the IRS for each of your independent contractors.
  • The employment taxes for the most recent year are only 10%, and best of all, there are no interest or penalties.
  • VCSP contracts obligate you to pay future taxes.
  • In particular, if you incorrectly assign personnel over several years, VCSP agreements lower the assessed employment taxes.
  • If section 530 doesn’t apply due to misclassification, VCSP may still be able to assist you in becoming eligible for section 530.

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