Business owners utilize a staff of employees and independent contractors for their regular operations and projects. Sometimes the lines may blur between who is an employee or an independent contractor. This can lead to improper classifications of employees. Businesses may end up withholding incorrect employee-related taxes. For more info on how to properly classify employees, check out our other article.
Missed Class on Classifying Employees?
In the best situations, businesses act proactively to correct mis-classifications of employees. In more dire and negligent circumstances, the IRS steps in and forces employers to explain and correct their classifications of employees and contractors.
A “Notice of Determination of Worker Classification” from the IRS provides employers a chance to rectify their employee classification per recommendations from an audit, or take their case to the US Tax Courts. It provides three determinations:
- Worker Classification – IRS determined that one or more individuals who provide services to the firm should be classified as employees.
- Section 530 treatment – Depending on the timeliness of filing your business tax returns and statuses of workers after 12/31/1977, you may be granted some tax relief. You may also get nothing at all on this.
- Amount of Employment Tax – The IRS determines the amount of employment-related taxes that is owed.
To Court or Not to Court?
Upon receiving the notice, you can decide if you want to take this further and file a petition to the US Tax Court. The deadline to file a petition is before the 91st day after the mailing date of the original Notice of Determination. The US Tax Court website provides more detailed information that will be needed to properly file the petition and prepare interested parties for the court system.
On the other hand, if you wish to not petition the issue further in court, you can accept the findings in the determination. Simply sign the waiver form (Form 2504-WC) that comes attached with the notice and send back to the IRS. Keep in mind that interest accrues on any penalties, so send the waiver as soon as possible to avoid more unnecessary interest costs.
Properly classifying employees can be an additional unseen cost for businesses. Having a team of professionals assist your business to prevent such unnecessary costs will pay dividends for your business in the future. That is where we can come in with the assist. Miklos CPA is a California-based tax and accounting firm that helps businesses with their taxation questions and accounting needs. We post articles like this periodically for our clients and for those seeking information on a certain tax topic. If you would like to know more about our services, contact us!