IRS offers a pass on misclassified indie contractors

Broker-dealers now have a low-cost way to clear their slate with the IRS if they have been misclassifying employees as independent contractors
OCT 27, 2011
Broker-dealers now have a low-cost way to clear their slate with the IRS if they have been misclassifying employees as independent contractors. Last week, the Internal Revenue Service kicked off its Voluntary Worker Classification Settlement Program, giving employers an opportunity to classify employees properly for a small payment to cover unpaid payroll taxes. Matthew L. Schwartz, government affairs counsel at the Financial Services Institute Inc., applauded the move but said that he expects it to have little impact on independent broker-dealers. Representatives at indie broker-dealers are properly classified as independent contractors, Mr. Schwartz said. “An analysis of the industry using the behavioral, financial and relationship control factors demonstrates that registered reps operate free from the level of control the IRS deems sufficient to warrant employee classification,” he said. Independent reps are responsible for their business operations and aren't subject to restrictions, except those imposed by regulations when dealing with clients. They usually own their own offices, hire and fire their own personnel and are subject to supervision primarily to comply with securities laws.

20-POINT PLAN

For federal tax purposes, the determination of who is a contractor and who is an employee turns on a 20-point test. States, however, may have different definitions, which can lead to confusion for independent-contractor firms. Some may violate the rules without knowing it. “The most prevalent example is housing reps and giving them a place to work from,” said Steven J. Insel, partner at Jeffer Mangels Butler & Mitchell LLP. “Some firms, without realizing it, will let a few people work in the home office and run into that situation.” Firms that take advantage of the government's program will save the expense of a large penalty. But if their independent contractors are deemed to be employees, the firms may be required to make costly changes, including changing their business model in extreme cases, adding workman's compensation coverage, withholding income tax payments and taking Medicare and Social Security deductions from wages, Mr. Insel said.

SET RECORD STRAIGHT

Further, those broker-dealers will have to set the record straight with the states in which they operate, and reconcile any withholdings they may have missed, he said. “Firms that know they've been violating the law should think about the program — this would only affect people who've blown it,” Mr. Insel said. To take advantage of the program, firms must file a Form 8952. If it is accepted, they will pay an amount equal to just over 1% of the wages paid to the reclassified workers for the past year. Employers won't have to pay interest or penalties, and they won't be audited on payroll taxes related to those workers for past years. Email Darla Mercado at [email protected]

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