When an organization misclassifies an employee as an independent contractor, payroll tax issues may result. This may leave the non-profit vulnerable to extensive penalties and fines.
Fortunately, all hope is not lost. In recent years, the Internal Revenue Service launched a program designed to allow many employers to resolve past worker classification issues by making a payment to cover past payroll tax obligations. Thereafter, the organization will be in compliance. This program is eligible to non-profits as well as for-profit corporations.
Three Criteria for Eligibility for the Voluntary Classification Settlement Program
Why should non-profits consider this program as an alternative solution to their IRS tax problem? Under the right circumstances, the program allows an entity to come back into compliance with the IRS will paying reduced penalties. To be eligible, the non-profit must meet the following requirements:
- The non-profit must have consistently treated its workers as nonemployees in the past.
- The non-profit must have filed all required 1099 Forms for the past three years.
- The non-profit cannot currently be subject to an audit by the IRS, the Department of Labor, or a state agency with regard to the classification of these workers. If the non-profit is being audited for different reasons other than payroll tax issues, the organization may still qualify for the Voluntary Classification Settlement Program. In addition, if the non-profit was audited in the past regarding the classification of workers it may still be eligible for the program as long as it has complied with the results of that audit and is not actively contesting the classification in court.
While this program may be a viable solution for some non-profits, the option should be considered carefully and with the guidance of an experienced attorney and tax advisor.