The Internal Revenue Service (IRS) has recently released information regarding a new settlement program to allow certain taxpayers to voluntarily reclassify workers. The program, Voluntary Classification Settlement Program (VCSP), provides relief from federal employment taxes for taxpayers that agree to classify its workers (or a group of its workers) as employees as opposed to independent contractors.
The VCSP is designed to provide an incentive to those taxpayers who either improperly or aggressively classified workers as independent contractors to treat such workers as employees on a prospective basis. The VCSP is available for both for-profit and nonprofit taxpayers.
In exchange for participating in the program, eligible taxpayers will receive the following benefits:
• Requirement to pay only 10% of the employment tax liability which would have been due on the compensation paid to the workers for the most recent tax year;
• Waiver of all interest and penalties that would have been due on the tax liability; and
• Audit protection for all prior years with respect to the workers included in the program.
Although the VCSP does provide a participating taxpayer some attractive benefits, the taxpayer must agree to extend the statute of limitations for the assessment of employment taxes an additional three years for the first, second and third tax years beginning after entering into the VCSP. Additional consideration must also be given to the state and local impacts of participating in the VCSP at the federal level.
To participate in the VCSP, certain requirements must be met. The taxpayer:
• Must have consistently treated included workers as nonemployees and filed all required Form 1099s for the previous three years;
• Cannot currently be under audit by the IRS; or
• Cannot currently be under audit concerning the classification of workers by the Department of Labor or by a state government agency.
Additionally, to the extent a taxpayer was previously audited for this issue by the IRS or Department of Labor, the taxpayer is only eligible under the VCSP if it complied with the results of such audit.
Once a taxpayer determines it is eligible and wants to voluntarily classify workers as employees, participation in the program is as simple as filing an application, Form 8952, with the IRS. The IRS does recommend filing the application at least 60 days prior to the date the taxpayer wants to treat the workers as employees. Once approved, the IRS and taxpayer will entered in a closing agreement at which time payment of tax will be due.
Additional information regarding the requirements for participating in the VCSP, obtaining the VCSP application and a list of frequently asked questions can be found on the IRS website at the links below.
Voluntary Classification Settlement Program Application, Form 8952
Frequently Asked Questions