May 22, 2024
Re: § 58.1-1821 Application: Withholding Tax
Dear *****:
This will respond to your letter in which you seek correction of the assessment of civil penalties issued to ***** (the “Taxpayer”) for the misclassification of workers for the taxable periods January 2021 through December 2022. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer, a landscaping business in Virginia, was audited for the taxable periods January 2021 through December 2022. The Department concluded that a number of the Taxpayer’s workers who were classified as independent contractors should have been classified as employees. As a result, assessments were issued for withholding tax and penalties. The Taxpayer filed an application for correction, contesting a number of audit adjustments.
After the application was filed, additional adjustments were made to the audit assessment and the Taxpayer is in agreement with the number of workers who were recategorized as employees. The only remaining issue is the application of the civil penalty.
DETERMINATION
Effective January 1, 2021, under legislation enacted by the 2020 General Assembly (Chapters 681 and 682 of the 2020 Acts of Assembly), Virginia added Chapter 19 to Title 58.1 of the Code of Virginia, relating to misclassification of employees as independent contractors. Within this chapter, Virginia Code § 58.1-1901 imposes civil penalties and potential debarment on employers that fail to properly classify an individual as an employee.
The Taxpayer contends that workers who were hired during the same 72-hour period should be considered one misclassification resulting in a single civil penalty. Based on this rationale, the Taxpayer seeks to reduce the amount of the civil penalty based on the number of distinct 72-hour periods during which the misclassified workers were hired.
Virginia Code § 58.1-1900 C provides that “all occurrences of misclassification of employees . . . made by the same employer at the same time, or within 72 hours, shall be deemed to be a single offense.” [Emphasis added]. As a practicality, the Department administers an “offense” as the discovery of one or more misclassification occurrences during one audit engagement. See the Guidelines for the Classification of Workers, issued as Public Document (P.D.) 21-133 (9/30/2021) (the “Guidelines”). If an audit uncovers any misclassifications of workers, such misclassifications are treated collectively as a single offense. In general, subsequent offenses will only be identified if occurrences of misclassification are found in subsequent engagements.
In addition, Virginia Code § 58.1-1901 imposes a civil penalty on employers that fail to properly classify their workers of “up to $1,000 per misclassified individual for a first offense, up to $2,500 per misclassified individual for a second offense, and up to $5,000 per misclassified individual for a third or subsequent offense.” [Emphasis added]. For purposes of computing the penalty, this statute clearly imposes the penalty on each worker that was misclassified as an independent contractor.
Thus, during a first audit, which includes a misclassification occurrence, the employer would be subject to a penalty of up to $1,000 for each misclassified worker, but would not be subject to debarment. Only during a subsequent, separate audit would the higher penalty rates and debarment sanctions apply. In accordance with this interpretation, an offense under Virginia Code § 58.1-1900 C is limited in its application to the determination of the rate of the civil penalty imposed and the duration of any potential debarment.
Based on the aforementioned statutory structure, the Department correctly imposed the civil penalty per misclassified individual and the Taxpayer’s request for relief cannot be granted. The Taxpayer will receive an updated bill that will include accrued interest to date. The Taxpayer should remit the balance due within 30 days of the bill date to avoid the accrual of additional interest and possible collection actions.
In addition, effective for audits completed after July 1, 2023, the Guidelines were revised to provide graduated penalty rates that would be determined based on the employer’s total number of workers. See P.D. 23-88 (7/31/2023). While the audit of the Taxpayer was completed before July 1, 2023, the Department notes that the Taxpayer would be subject to the full $1,000 per worker penalty under the revised penalty rates.
The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s web site. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at (804) *****.
Sincerely,
James J. Alex
Tax Commissioner
Commonwealth of Virginia
AR/4621.X