Overview
to address it as the consequences of failure to do so can be financially devastating to the company. There are currently a few different methods to address a possible worker classification issue: 1. Do nothing and hope for the best. If examined attempt to fall under the Classification Settlement Program. 2. Make modifications to classification on a going forward basis but not advise the IRS of the change (stealth change) and hope for the best. 3. Attempt to fall under Section 530 relief provisions. 4. Enter the Voluntary Classification Settlement Program. Below you will find a set of facts with respect to Miami Business Services, Inc. In Addition, an employee census is provided as well as a completed form SS_8, “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.” You are to write a memorandum to answer question#1, no more than 3 pages. You have been asked to write a memorandum to Miami Business Services, a new client, to advise them of the best course of action with respect to correcting the worker classification issue that has arisen. Your memo should cover: 1. Does the company have a worker classification issue? If so, describe why. 2. Which of the workers are subject to reclassification as employees? 3. What are the available options? 4. Which option do you recommend and why do you feel it is superior to other options? 5. What are the requirements to qualify for the recommended option? 6. Based on the option you choose, what needs to be done going forward, if anything? 7. In making your recommendation you should consider not only the current cost but the ongoing cost of your recommendation. FACTS: Miami Business Services, Inc. (MBS) is a Florida corporation that was formed in 2013. The sole shareholder and officer is Ronald M. Donald. MBS is in the consulting business. It has 49 employees. A census of employees for 2020 with 2019 data appears on a schedule attached below: MBS has treated some workers as employees and others as “independent contractors.” The sales- consultant independent contractors, in many cases, provided the same services that the sales- consultant employees provided. In June 2020 one of the MBS independent contractors (IC) asked to be classified as an employee. Ronald responded that he could not afford to do so and if the IC wanted to work for the company, he would accept his status as an independent contractor. As a side note, workers who were classified as ICs were required to sign a statement that they were independent contractors and understood and agreed to that status as well as would be responsible for their own taxes. Also, some of the ICs were provided timely 1099s which reported their income as other compensation (see employee census).2
This had been Ronald’s practice since forming MBS. The employee believed that MBS was in fact profitable because one of its regular customers was a company controlled by the country of North Kim and Ronald drove a late model Mercedes. The IC was told by a friend of his that the friend’s company had been examined by IRS and that the friend was reclassified from being an independent contractor to an employee by IRS. The friend also confided that he had heard that one of that company’s independent contractors had blown the whistle on the company and received “big bucks” from IRS. The IC immediately reported it to IRS. The IRS representative provided the IC with a form SS-8 to complete and submit (see attached). The IC showed the SS-8 to Ronald and was immediately fired. ADDITIONAL FACTS: 1. The company is not currently under examination by the IRS nor the State. 2. The workers who were treated as independent contractors were always treated as such. 3. The forms W-2 or 1099s were issued or not issued as shown on the attached worker’s census. 4. At the time MBS was started Ronald had checked around with other consultancy companies (in the same general industry) in the area and found that these companies had treated their sales- consultants for the most part as independent contractors. Ronald never did a formal study to confirm what he was able to determine by making calls to friends in the same business