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I hired an independent contractor to help with construction work for the first part of the year. I had him complete a W-9 form. He happened to be an excellent worker so I decided to hire him as an employee full-time and put him on payroll. I'm not sure exactly what I'm suppose to do though for issuing him a 1099 and W-2 form for the year of work. Do I have to take out additional taxes since he became a full-time W-2 employee? What are the best next steps?
ANSWER
Expert James Noone's Answer:
This question is really based on facts and circumstances. A good form to review is the SS-8 from the IRS.gov website. The question you ask is dependent on how much control you had over the contractor, whether they provided you with a bid, did they use their own tools, did they perform the work without direction from you, and were they independently self employed (doing work for others besides you). If yes, then file a 1099 MIsc for the time up until you hired them and a W-2 later. If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker (the relief provisions, discussed below, will not apply).
The Voluntary Classification Settlement Program (VCSP) is a new optional program that provides taxpayers with an opportunity to reclassify their workers as employees for future tax periods for employment tax purposes with partial relief from federal employment taxes for eligible taxpayers that agree to prospectively treat their workers (or a class or group of workers) as employees. To participate in this new voluntary program, the taxpayer must meet certain eligibility requirements, apply to participate in the VCSP by filing Form 8952, Application for Voluntary Classification Settlement Program, and enter into a closing agreement with the IRS.
The VCSP is available for taxpayers who want to voluntarily change the prospective classification of their workers. The program applies to taxpayers who are currently treating their workers (or a class or group of workers) as independent contractors or other nonemployees and want to prospectively treat the workers as employees. A taxpayer must have consistently treated the workers as nonemployees, and must have filed all required Forms 1099 for the workers to be reclassified under the VCSP for the previous three years to participate in VCSP. Additionally, the taxpayer cannot currently be under audit by the IRS and the taxpayer cannot be currently under audit concerning the classification of the workers by the Department of Labor or by a state government agency.Eligibility
A taxpayer participating in the VCSP will agree to prospectively treat the class or classes of workers as employees for future tax periods. In exchange, the taxpayer:
In addition, as part of the VCSP program, taxpayer will agree to extend the period of limitations on assessment of employment taxes for three years for the first, second and third calendar years beginning after the date on which the taxpayer has agreed under the VCSP closing agreement to begin treating the workers as employees.
