IRS Offers Voluntary Settlement Program for Classification of Employees
Classification of workers has been a hot topic over the past few years, and the penalties and fines assessed against employers for misclassifying workers as independent contractors as opposed to W-2 employees has been a significant revenue generator for government agencies. The Internal Revenue Service (“IRS”) has issued guidance on whether a worker should be classified as an independent contractor or a W-2 employee, generally focusing on the extent of control and direction the contractor of services has over the individual performing the work. Employers who are found to have misclassified workers have been subject to hefty fines and penalties and the threat of future audits.
Now, the IRS has announced a new program, the Voluntary Classification Settlement Program (VCSP), for businesses who have misclassified workers as independent contractors. Effective September 21, 2011, the program gives employers an opportunity to proactively reclassify their workers as W-2 employees.
To be eligible, the employer must meet certain criteria:
- They must have consistently treated the workers as non-employees;
- They must have filed 1099s for the workers for the previous three pears;
- Cannot already be under an audit by the IRS or other government agency regarding classification of workers. If an employer had been previously audited, they may participate in this program only if they have complied with the results of that audit.
If the taxpayer meets the criteria, they may participate in the VCSP by agreeing to the following:
- They must pay 10% of the employment tax liability that would have been due on compensation paid to the workers for the most recent tax year;
- They will not have to pay interest and penalties on it;
- They will not be subject to audit of the reclassified workers for prior years; and
- They will agree to extend the statute of limitations on assessment of employment taxes from three to six years.
When considering whether to participate in the program, employers should be aware that while the VCSP protects employers from the IRS, it does not offer protection from state initiatives or from claims for the noncompliance during the past time periods. For example, there may be prior state or local taxes or unemployment or workers’ compensation insurance now due or the worker could have been entitled to leave, participation in benefit programs or been denied minimum wage or overtime wages.
Employer should do a thorough risk-benefit analysis with competent professionals prior to deciding whether to participate in VCSP. Anyone who wishes to do so must submit Form 8952, Application for Voluntary Classification Settlement Program (VCSP) at least sixty (60) days before they wish to begin the process. If eligible, the IRS will contact the employer.
For more information, see:
http://www.irs.gov/pub/irs-drop/a-11-64.pdf
http://www.nixonpeabody.com/publications_detail3.asp?ID=4053