Being a business owner is much more than simply making sure your business run. It also includes hiring employees, making sure they’re classified correctly and paying payroll taxes. Occasionally, a business may classify its workers as independent contractors when they should have been designated as employees. The Internal Revenue Service (IRS) offers the Voluntary Classification Settlement Program (VCSP), a valuable opportunity for employers to address potential misclassifications of workers while reducing taxes, avoiding penalties and audits. Let’s look at the details of the VCSP and how businesses can use this important program.
The VCSP is a voluntary program that provides an opportunity for taxpayers to reclassify their workers as employees for employment tax purposes for future tax periods, with partial relief from federal employment taxes. The program applies to taxpayers who are currently treating their workers (or a class or group of workers) as independent contractors or other nonemployees and want to prospectively treat the workers as employees.
A taxpayer must have consistently treated the workers to be reclassified as independent contractors or other nonemployees, including having filed all required Forms 1099 for the workers to be reclassified under the VCSP for the previous three years to participate. Additionally, the taxpayer cannot currently be under employment tax audit by the IRS and the taxpayer cannot be currently under audit concerning the classification of the workers by the Department of Labor or by a state government agency.
If an employer decides to participate in the VCSP, they must agree to prospectively treat the class or classes of workers as employees for future tax periods. The employer is then required to do the following:
- Pay 10 percent of the employment tax liability that would have been due on compensation paid to the workers for the most recent tax year, determined under the reduced rates of section 3509(a) of the Internal Revenue Code;
- Not be liable for any interest and penalties on the amount; and
- Not be subject to an employment tax audit with respect to the worker classification of the workers being reclassified under the VCSP for prior years.
To participate in the VCSP, an employer must apply using Form 8952, Application for Voluntary Classification Settlement Program. The application should be filed at least 120 days prior to the date the taxpayer wants to begin treating its workers as employees. The IRS will contact the employer/taxpayer to complete the process after reviewing the application and verifying the taxpayer’s eligibility. Eligible taxpayers accepted into the VCSP will enter into a closing agreement with the IRS to finalize the terms of the VCSP and will simultaneously make full and complete payment of any amount due under the closing agreement.
Classifying employees is critical for managing a business and avoiding tax liabilities and audits. The IRS Voluntary Classification Settlement Program serves as a valuable opportunity for employers to rectify worker misclassifications, alleviate tax burdens and establish future compliance. If you feel your business may benefit from this program, contact an experienced tax attorney to help you navigate the program’s eligibility criteria and adhere to the appropriate steps.
Allison Soares is a partner and tax attorney at Vanst Law. It doesn’t matter the issue: audits, collections, appeals, international disclosures, grumpy people— Allison enjoys fixing problems. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits.
