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How to Reclassify an Independent Contractor as an Employee

Author: Christine P. Corrigan

Employers often use independent contractors to address temporary projects or fluctuations in business demands. One major risk associated with using independent contractors is misclassification. Disputes regarding the classification of independent contractors may arise from an audit by the Internal Revenue Service (IRS), the U.S. Department of Labor (DOL) or similar state agencies, or from a lawsuit. These legal actions may result in an order or settlement requiring the employer to reclassify certain workers.

The employer also may voluntarily decide to reclassify certain workers for other business reasons. For example, the employer may have decided to participate in the IRS's Voluntary Classification Settlement Program (VCSP). This program allows certain employers to limit their federal employment tax liability if they voluntarily reclassify workers as employees. The program has strict eligibility requirements. Employers accepted into the VCSP will negotiate a resolution of their past payroll tax liability and will not be liable for interest and penalties on that amount. They also will avoid any employment tax audit regarding those reclassified workers.

Because the liabilities resulting from reclassification often are substantial, the employer should work closely with its HR professionals, legal counsel and tax and benefit accountants when reclassifying independent contractors as employees.

This How To assumes that the employer has decided to reclassify an independent contractor or group of independent contractors. In that light, the employer should consider following the steps set forth below.