Authored by Jeff Burns
On September 22, 2011 the IRS announced a new Voluntary Classification Settlement Program (VCSP) that allows companies (technically, any taxpayer) to voluntarily reclassify workers as employees for employment tax purposes in exchange for partial relief from federal employment taxes that would otherwise be owed for the period of time prior to the reclassification. In describing the VCSP in Announcement 2011-64, the IRS acknowledged that “the determination of the proper worker classification status under the common law may not be clear.” Because of this lack of clarity, the IRS determined that “it would be beneficial to provide taxpayers with a program that allows for voluntary reclassification of workers outside of the examination context and without need to go through normal administrative correction procedures applicable to employment taxes.” A copy of IRS Announcement 2011-64 can be found here, and the IRS’ Frequently Asked Questions can be found here. Companies that are accepted into the VCSP will only owe 10% of the payroll taxes that would have been owed for the previous year had the workers been classified as employees, will not owe any interest or penalties, and will not be audited by the IRS on payroll taxes related to these reclassified workers for prior years.
Eligibility: There are three criteria for eligibility. Applicants must: (1) consistently have treated the workers as non-employees; (2) have filed all required Forms 1099 for the workers in the previous three years; and (3) not currently be under audit by the IRS, Department of Labor or any state agency concerning the classification of its workers. Additionally, companies must be in compliance with the results of previous IRS or DOL classification audits. (Of course, if an IRS or DOL audit confirmed that workers were properly classified as independent contractors, the benefits of participating in the VCSP are less than clear.)
Process: To apply, companies must submit Form 8952 at least 60 days before they intend to begin treating their workers as employees. Companies that are accepted into the VCSP must enter into a closing agreement with the IRS, in which, among other things, they agree to prospectively treat the workers as employees. Additionally, for the first three years of the program participating companies will be subject to a special six year statute of limitations, rather then the usual three years that generally applies to payroll taxes. Along with the signed closing agreement, companies must make full and final payment of any amount due under the VCSP.
Worth it? As the IRS acknowledged, whether workers should be classified as independent contractors or employees requires a detailed factual and legal analysis. While the VCSP does provide some protections to companies that desire to reclassify their workforce, it has no effect on any back taxes or penalties that might be assessed by any state or local taxing authority, and participation in the VCSP could result in wage and hour lawsuits from reclassified workers, including claims for overtime. Companies are strongly advised to consult with legal counsel before applying for the VCSP.