The IRS is giving broker-dealers a chance to come clean on classifying independent contractors, but firms that fess up will take on the increased cost of following the letter of the law.
Broker-dealers have a chance to come clean to the IRS for cheap if they've been misclassifying workers as independent contractors, but firms that fess up will take on the increased cost of following the letter of the law.
The Internal Revenue Service yesterday kicked off its Voluntary Worker Classification Settlement Program, giving employers an opportunity to classify employees properly for a small payment to cover previous payroll taxes.
Firms have to file a Form 8952 to apply, and if they are 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.
Matthew L. Schwartz, government affairs counsel at the Financial Services Institute Inc., applauded the move but noted that he doesn't expect it to affect broker-dealers much. “We have a history and record of properly classifying our advisers as independent contractors, and we're glad to see the IRS moving forward with this.”
Firms that have been improperly classifying employees as indie contractors but wish to set things right with the Tax Man face more-stringent standards. Independent-contractor firms are at the most risk, as they could slip up on classifications in a number of ways.
The determination of who's a contractor and who's an employee turns on a 20-point test, but it's possible for state agencies to have different definitions of who's an employee and who's an independent contractor. That can lead to confusion for independent-contractor firms.
“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.”
Rectifying the issue will save the offending firms from a large penalty, but they will have to make changes if those individuals are actually employees. That could mean changing a firm's business model in extreme cases, as well as getting workman's compensation coverage and withholding from wages for Medicare and Social Security, Mr. Insel said.
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 added.
“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.
