The IRS Classification Settlement Program (CSP) offers a chance to settle your employment tax debt due to worker misclassification if you do not qualify for Section 530 relief.
CSP agreements typically result in a substantial reduction of assessed employment taxes, especially if you misclassified workers over several years.
The CSP allows you and the IRS tax examiners to resolve worker classification cases early in the audit process, reducing burdens on you. The procedures also ensure that if you qualify for Section 530 relief, the Section 530 relief procedures will be properly applied.
But there’s a catch. In order to qualify for the CSP, you must have filed all required 1099s for the independent contractors disputed by the IRS.
Generally, you will qualify for the CSP if you have timely filed all required 1099s for the workers that you have misclassified as independent contractors. If you failed to file the required 1099s, you will not qualify for the CSP.
Depending on the extent to which you have complied with IRS reporting requirements, and the strength of your arguments for why your workers are really independent contractors rather than employees, CSP agreements will vary in the percentage of employment tax adjustments offered.
If you meet the reporting consistency requirement (in other words, you timely filed all of your 1099s for the workers in question), you satisfy either the substantive consistency requirement or the reasonable basis requirement, and you have at least a colorable argument that you satisfy the other requirement, then the CSP offer will be an adjustment of 25 percent of the employment tax owed for the most recent tax year under examination.
A “colorable argument” means that your argument for why you meet the requirement has some merit but is not sufficient to fully satisfy the test.
Key point. The CSP savings here are huge (25 percent of one year, or about 8 percent of what could be). Without the CSP, you likely would face back payroll taxes, penalties, and interest on three years.
If you meet the reporting consistency requirement but clearly do not meet the substantive consistency requirement or clearly do not meet the reasonable basis test, the offer will be a full employment tax adjustment for the most recent tax year under examination. In other words, you will be required to pay 100 percent of the employment tax due for the year under examination.
Again, this is a huge savings: one year of payroll taxes versus three years of payroll taxes, penalties, and interest.
With both the 25 percent and 100 percent deals, you must agree to classify the workers in question as employees on a going-forward basis, thus ensuring future compliance in the eyes of the IRS.
If you would like to discuss the CSP, please don’t hesitate to get in touch with me.