If you’re a freelancer, independent contractor, or employer who hires freelancers, you’ll want to know how Louisiana Act 297 (aka the the “Fresh Start Program” and “Voluntary Disclosure Program”) might influence you or your workers’ classification.
If you’re an employer with only W2 employees, then move along – nothing for you to see here.
Worker Classification Compliance
Increasingly, businesses of all sizes are outsourcing projects to service vendors, independent contractors and freelancers. Correspondingly, these groups are entitled, by law, to certain rights regarding how, where and when they perform the work. When a company follows the law, they are said to be “in compliance.”
Check out: Compliance: A state-by-state guide
But not all employers are in compliance. Some treat their independent contractors like employees but don’t fulfill the corresponding obligations such as withholding taxes or providing worker’s compensation coverage. This is “misclassification”.
Act 297 gives employers two ways to rectify this problem: The Fresh Start Program and the Voluntary Disclosure Program.
Louisiana Act 297: Fresh Start Program
The Louisiana Fresh Start Program is a voluntary program that provides a business with literally a “fresh start.” It allows an employer to reclassify an independent contractor to an employee and in exchange, the employer will have any tax liability, penalties and interest accrued, that should have been collected in the first place, forgiven.
Louisiana Act 297: Voluntary Disclosure Program
Despite the similar sounding names, the Voluntary Disclosure Program is different.
Under this program, businesses can voluntarily and anonymously pay the back taxes owed as a result of worker misclassification. Employers will not, however, have to make any commitments moving forward to reclassify their independent contractors. The benefit to the Voluntary Disclosure program is that it safeguards the company from having to pay any penalties it would have had to pay if they’d been found guilty of misclassifying their workers.
In addition, employers can also forego paying the back taxes they owe for their workers under the Voluntary Disclosure Program if they meet certain conditions:
They must have filed all the federal tax forms required for their independent contractors, like 1099-NEC and 1099-MISC.
They must have always treated the worker, and any similar worker, as independent contractors.
The employer must have had one of the following reasons to believe they had a reasonable basis for treating the worker as an independent contractor:
A court case or IRS ruling on which to rely on
An IRS audit that did not require worker reclassification
A common practice in the employer’s industry that this kind of work is done by freelancers
A history of always treating this kind of work as done by an independent contractor
An accountant or legal advisor’s advice to treat the worker as an independent contractor
The minimum penalty for misclassification of a contractor with $50k in wages is $1,550.
Download our free guide on W2 and 1099 worker classification.