Nonprofit Accounting Basics

New IRS Program May Allow Exempt Organizations to Reclassify Contractors as Employees for Tax Purposes

Note: Articles published before January 1, 2017 may be out of date. We are in the process of updating this content.

The IRS recently announced some interesting news relating to the treatment of independent contractors: a voluntary program now provides an opportunity for taxpayers, including exempt organizations, to reclassify their workers as employees for employment tax purposes. This program was launched in conjunction with a Department of Labor initiative to step up enforcement related to misclassification of employees in order to avoid providing employment protections. Several federal agencies and states have agreed to coordinate enforcement and share information regarding worker misclassification.

The program applies to taxpayers currently treating workers as independent contractors or other nonemployees. You will want to consider this program if you have employees misclassified as independent contractors, and it has been too expensive to correct the classification issue in the past. To qualify for the program, the workers must have been consistently treated as nonemployees and all associated 1099s must have been filed for the previous three years. Your organization cannot currently be under audit, and, if it has previously been audited regarding worker classification, it will only be eligible if it has complied with the results of the audit.

As part of the program agreement, the organization will agree to treat the workers as employees for future periods. In exchange, the organization will pay only ten percent of the employment tax liability that was due on the compensation paid to the workers for the most recent year. The organization will not be liable for any interest and penalties on the amount and will not be subject to a worker classification employment tax audit of the workers being reclassified under the voluntary program.

Forms are available to apply for participation in the program. The application should be filed 60 days before the organization wants to begin treating workers as employees. Once accepted into the program, the organization will be required to make a full and complete payment of any amount due.

Download the form from the IRS.