Hale Sheppard

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“IRS Introduces New Settlement Program…” Sheppard

Issue: The article, IRS Introduces New Settlement Program for Worker-Classification Issues: Putting the Latest Employment Tax Offer in Perspective by Sheppard discusses options available to companies that are facing IRS scrutiny for classifying alleged employees as independent contractors.

Introduction: Many companies find that hiring independent contractors reduces overall costs. Costs associated with an employee such as health benefits, the company’s portion of payment for unemployment and FICA taxes, and other related advantages of the sort are not costs that are incurred if a company were to hire contractors. Because companies see the many advantages of independent contractors, the IRS has been more meticulous in exposing businesses that classify true employees as independent contractors. There are three options of defense for companies that are facing IRS scrutiny for this misclassification or possible misclassification. Those options are: Act Sec. 530 Relief, the Classification Settlement Program (CSP), or the Voluntary Classification Settlement Program (VCSP).

Act Sec. 530 Relief: The act was enacted by Congress as an attempt for small businesses to protect themselves against the IRS, as there was an increased enforcement of employment tax laws. Before the act was created, there were often cases where a business was forced reclassification and the double payment of taxes was made. For example, if the company had did not withhold employee taxes and the contractor instead paid self-employment taxes, by reclassifying in the future year, the company would be required to pay those taxes thereby having the double payment of taxes. According to the Internal Revenue Manual, the consideration of the relief act should be the first step when there is a classification issue. There are three criteria that which need to be met to satisfy the relief act. That is the independent contractors are still to be...
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