Fixing Employee Classification Errors with the IRS

1. Fixing Employee Classification Errors with the IRS Security, plus federal unemployment tax. Then add penalty fees that can hit 20% of what you owe. But wait, there's more. If the IRS decides you "willfully" misclassified workers, penalties jump to 100% of the taxes owed. Yeah, you read that right. Double the tax bill. Your Options for Fixing This The Voluntary Classification Settlement Program (VCSP) is probably your best bet if you catch this early. You pay 10% of what the employment tax liability would've been for the past year, agree to treat the workers as employees going forward, and the IRS doesn't audit your payroll taxes for those years. If you're already under examination, things get trickier. A Tax Controversy Lawyer can help negotiate with the IRS, especially if there are legitimate questions about worker classification. Sometimes the facts aren't clear-cut, and you need someone who knows how to argue your case. For ongoing Tax Resolution issues, you might qualify for installment agreements or other payment plans. The key is addressing this before penalties pile up beyond what your business can handle.

2. Don't Wing This One Employee classification errors aren't something you want to handle alone. The rules are complex, the penalties are brutal, and the IRS has gotten increasingly aggressive about enforcement. A qualified Tax Lawyer can review your situation, determine your best options, and handle communications with the IRS. Look, if you've been treating employees as independent contractors when they shouldn't be, the IRS is eventually going to notice. And when they do, it's not just a polite letter asking you to fix things going forward. The classification mess usually starts innocently enough. You hire someone, they seem independent, maybe they work from home or set their own hours. So you issue a 1099 instead of putting them on payroll. Problem is, the IRS has pretty specific rules about who qualifies as an independent contractor, and "they work remotely" isn't one of them. What Actually Triggers IRS Attention The IRS looks at three main things: behavioral control, financial control, and the relationship type. If you're telling someone when to work, how to do their job, and providing all their equipment, they're probably an employee. Period. Doesn't matter what your contract says. Common triggers include former employees filing for unemployment benefits, workers filing SS- 8 forms asking for classification determination, or payroll tax audits that uncover the pattern. Sometimes it's just random - the IRS runs compliance checks on businesses in certain industries. The Real Cost of Getting It Wrong Here's where it gets expensive fast. You'll owe the employer portion of Social Security and Medicare taxes, plus penalties and interest. We're talking 1.45% for Medicare, 6.2% for Social.