According to NBAA, IRS officials recently indicated the agency plans to intensify audits of companies for improperly classifying employees as independent contractors, which could include contract pilots frequently used by corporate flight departments. The independent contractor issue is so concerning and complicated that NBAA issued a Best Practices for Utilizing Independent Contractors guide for business aircraft operators in 2011. Because contractor wages are not subject to tax withholding, the Government Accountability Office estimates that misclassified workers are costing the IRS $4 billion in lost tax revenue each year.
To help stem the problem, the IRS is promoting its Voluntary Classification Settlement Program (VCSP), which allows taxpayers to voluntarily change the classification of their workers. Those who agree to prospectively treat any misclassified workers as employees then have to “pay 10 percent of the employment tax liability that would have been due on compensation paid to the workers for the most recent tax year,” according to the IRS. Several businesses have received letters from the IRS inviting them to participate in the VCSP, NBAA said.
However, NBAA warned that companies should be cautious before applying for the VCSP, since the IRS might not accept the application, leaving the problem unresolved. The IRS is also working with the U.S. Department of Labor and 15 state agencies to reduce misclassification of workers, share information and coordinate enforcement.