Sometimes employers misclassify their workers as independent contractors (self-employed) when, in fact, they are employees. And when I say “sometimes” I mean millions of times. It is very common. I’m sure some of them do it unknowingly, but I am also certain that some employers do it because they don’t want the responsibility and costs associated with having actual employees. The difference is that employers must withhold and/or pay a number of taxes when a worker is also an employee, including income taxes, Social Security, Medicare, and unemployment.
The IRS would love it if taxpayers (including employers) would fall in line with the IRS’ dreams of “voluntary compliance,” but one of the things they do when this doesn’t happen is they set up programs to entice them to come clean on their own. The IRS doesn’t call it an amnesty program; I don’t think they particularly like that word. In fact, I put the word “amnesty” in the search box of the IRS website and exactly two results came up, and both of them were in the context of a state amnesty program. The word tends to have the connotation of getting out of paying taxes or making use of a legal loophole, and the IRS really doesn’t want to suggest that.
But I can use it. I like the word. The IRS has an amnesty program for reporting offshore accounts called the Offshore Voluntary Disclosure Program. And the IRS has an amnesty program for coming clean on worker classification issues called the Voluntary Classification Settlement Program. But the VCSP has been very poorly administered over the years. It appears that just about every aspect of the program has some kind of flaw. Even the most basic things are not working, like correctly determining eligibility for the program, monitoring compliance with the program, and analyzing program performance. If you want to read about how screwed up VCSP is, be my guest. Full report here.