The IRS launched a new program that will enable many employers to resolve past worker classification issues at a low cost by voluntarily reclassifying their workers.  This new program will allow employers the opportunity to get into compliance by making a minimal payment covering past payroll tax obligations rather than waiting for an IRS audit.

When an employer improperly classifies its employees as independent contractors, such employer doesn’t have to pay various taxes, including unemployment insurance taxes, workers’ compensation premiums or the employer’s share of Social Security and Medicare taxes.  Workers also may have fewer rights, including overtime protections.

Under the new Voluntary Classification Settlement Program (the “VCSP”), eligible employers can obtain substantial relief from federal payroll taxes they may have owed for the improperly classified employees, if they prospectively treat such individuals as employees. To be eligible to participate in the VCSP, an employer must:

  • Consistently have treated the workers in the past as nonemployees,
  • Have filed all required Forms 1099 for the workers for the previous three years
  • Not currently be under audit by the IRS, the Department of Labor or a state agency concerning the classification of these workers

Interested employers can apply for the program by filing Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before they want to begin treating the workers as employees.

Employers accepted into the program will pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers for the past year. No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years. Participating employers will, for the first three years under the program, be subject to a special six-year statute of limitations, rather than the usual three years that generally applies to payroll taxes.

If an employer doesn’t come forward and is later caught wrongly classifying  its employees as independent contractors, such an employer could be liable for three years’ worth of employment taxes, plus interest and penalties.

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Should you have any questions regarding the above-mentioned issues or other tax-related matters, please contact us today.