VCSP CPA discusses classifying Workers for Form 8952 | Subcontractors versus Employees | 60 day rule for Form 8952

VCSP CPAs get questions about the 60 day rule for submitting Form 8952. Apparently lots of employers got stung by that. The 60 day rule for VCSP (Voluntary Classification Settlement Program) means you must submit Form 8952 60 days before you re-classify subcontractor workers as employees. And begin payroll taxes on them of course.

Most Form 8952 CPAs expected the IRS to change the 60 day rule eventually. Why? No employer wants the liability of all those back payroll taxes just because they made a timing error in the VCSP application and Form 8952. If you work your way the IRS ladder far enough you’ll find the 60 day rule is a gray area. Apparently the IRS accepts some VCSP applications on employers who filed Form 8952 in the 1st Quarter of 2013 and starting paying payroll taxes in the 1st Quarter of 2013, even though the 60 day rule wasn’t followed. But there’s no guarantee until change the regs.

VCSP Background

We’ve published other VCSP (Voluntary Classification Settlement Program) posts including:

• VCSP program.
• VCSP Consequences.
• 20 factors to identify employees for VCSP.
• IRS cooperates with the Department of Labor on VCSP.

“The IRS loses millions in employment taxes on workers classified as independent contractors, but are actually employees.”
- Gary Bode, VCSP CPA and Payroll Accountant

Employee vs. Subcontractor: What’s at Stake with Form 8952?

Let’s look at this issue from the perspective of our demo company, VCSP CPA. It pays three people as independent contractors, for a convenient aggregate total of $100,000 per year. VCSP CPA pays no employment or unemployment taxes on these folks. Instead they issue a Form 1099-MISC to their subcontractors. The independent contractors must declare this as income on their own tax returns. If VCSP CPA paid these three folks as employees, the additional costs would be:

• $6,200 of Social Security employer “matching” taxes.
• $1,450 of Medicare employer “matching” taxes.
• $168 of Federal Unemployment taxes (FUTA).
• Let’s say $700 of State unemployment tax (SUTA).

So, VCSP CPAwould have had to pay an additional $8,518 just in taxes for the aggregate $100,000 compensation on these three independent contractors, if they were employees.

And that’s not the whole financial picture either. They also save health insurance premiums, 401(k) contributions, sick pay, vacation pay etc. The entire cost burden to VCSP could be $12,000+/-. Ouch. So, there is good financial incentive to classify workers as subcontractors instead of employees.

So what is an Employee?

The following criteria factor into who the IRS considers as employees. There is a no cut and dried answer. Each case is unique. While the following list is common knowledge, this exact version comes from an excellent white paper put out by CFO magazine.

1. Instructions. A worker who complies with other persons’ instructions about when, where and how he or she is to work ordinarily is an employee.

2. Training. Training a worker indicates that the person(s) for whom the services are performed wants the services performed in a particular method or manner.

3. Integration. Integration of the worker’s services into the business operations generally shows that he worker is subject to direction and control.

4. Services Rendered Personally. If the services must be rendered personally, presumably the person(s) for whom the services are performed are interested in the methods used to accomplish the work as well as in the results.

5. Hiring, supervising and paying assistants. If the person(s) for whom the services are performed hire, supervise and pay assistants, this generally shows control over the workers on the job.

6. Continuing Relationship. A continuing relationship between the worker and the person(s) for whom the services are performed indicates that an employer-employee relationship exists.

7. Set Hours of Work. The establishment of set work hours is a factor indicating control.

8. Full-Time Work Required. If the worker must devote substantially full time to the business of the person(s) for whom the services are performed, such person(s) have control over the amount of time the worker spends working restricts the worker from doing other gainful work.

9. Doing Work on Employer’s Premises. If the work is performed on the premises of the person(s) for whom the services are performed, this suggests control over the worker, especially if the work could be done elsewhere.

10. Order or Sequence Set. If a worker must perform services in the order or sequence set by the person(s) for whom the services are performed, the worker is not free to follow the worker’s own pattern of work but must follow the established routines and schedules of the person(s) for whom the services are performed.

11. Oral or Written Reports. A requirement that the worker submit regular or written reports to the person(s) for whom the services are performed indicates a degree of control.

12. Payment by Hour, Week, Month. Payment by the hour, week or month generally points to an employer-employee relationship, provided that this method of payment is not just a convenient way of applying a lump sum agreed upon as the cost of a job.

13. Payment of Business and/or Travel Expenses. If the person(s) for whom the services are performed ordinarily pays the worker’s business and/or traveling expenses, the worker generally is an employee.

14. Providing Tools and Materials. The fact that the person(s) for whom the services are performed provides significant tools, materials and other equipment tends to show the existence of an employer-employee relationship.

15. Significant Investment. A lack of investment in facilities indicates dependence on the person(s) for whom the services are performed for such facilities and, accordingly, the existence of an employer-employee relationship.

16. Realization of Profit or Loss. A worker who can realize a profit or suffer a loss as a resultof the worker’s services (in addition to the profit or loss ordinarily realized by employees) generally is an independent contractor, but the worker who cannot is an employee.

17. Working for More Than One Firm at a Time. A worker that performs more than de minimis services for a multiple of unrelated persons or firms at the same time generally indicates that he or she is an independent contractor. However,a worker who performs services for more than one person may be an employee of each of the persons, especially where such persons are part of the same service arrangement.

18. Making Services Available to General Public. The fact that a worker makes his or her services available to the general public on a regular and consistent basis indicates an independent contractor relationship.

19. Right to Discharge. The right to discharge a worker is a factor indicating that the worker is an employee. In contrast, an independent contractor cannot be fired so long as he or she produces a result that meets the contract specifications.

20. Right to Terminate. An employer-employee relationship is indicated if the worker has the right to end his or her relationship with the person(s) for whom the services are performed at any time he or she wishes without incurring liability.

We’re a Wilmington NC CPA firm that deals with VCSP and Form 8951. Our virtual office allows us to offer excellent long distance service. Our posts show our ability and proactive philosophy. For a free phone consult, please call (910) 399-2705.

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