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Business Advisory | Mergers & Acquisitions

S corp Worker Misclassification Audits Expected to Rise

Marc Ausfresser, J.D., LL.M. 07.24.2014 | eVisor

Independent contractor or employee? The issue of S corporations misclassifying workers is one of growing concern for the IRS, with increased audits on the horizon. And the waters are not always clear. For example: Depending upon circumstances, a member of the board could be an independent contractor or an employee.

To give businesses an opportunity to voluntarily reclassify their workers as employees, the Voluntary Classification Settlement Program (VCSP) was developed by the IRS. To be eligible to participate in the VCSP, the taxpayer must have consistently treated the workers as non-employees, including having filed the required forms 1099.

The VCSP is open to employers seeking to voluntarily change the classification of workers they have been treating as independent contractors or nonemployees to employees. The employer must have filed the required forms 1099 for those workers in the past 3 years and not be under a worker classification audit by the IRS, Department Of Labor, or a state.

If accepted, employers pay no interest or penalties and the IRS will not initiate payroll tax audits on these workers for any prior years. Further, the taxpayer has to pay, in general, 10% of the employment tax liability that would have been due on the workers being reclassified for the most recent tax year had those workers actually been classified as employees for that year.

Questions?  Contact your Berdon advisor or Marc Ausfresser at 212.331.7639 or


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