Under a new voluntary program launched by the IRS on September 21, 2011, employers can prospectively reclassify independent contractors as employees without having to provide a reasonable basis for its past treatment of the workers as independent contractors. The new Voluntary Classification Settlement Program (“VCSP”) provides partial relief from employment tax liability for previous years.  

The VCSP applies to employers who are currently treating workers as independent contractors or other non-employees and want to treat the workers as employees in the future. To be eligible, the taxpayer must have consistently treated the workers as non-employees and filed Form 1099s for the workers for the past three years. A taxpayer who is currently under audit for classification of workers is ineligible. To apply, the taxpayer must submit an application, IRS Form 8952 and a Power of Attorney (Form 2848).

In addition to agreeing to prospectively treat the workers as employees, the taxpayer must pay 10 percent of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year (determined under Code Section 3509). Employers accepted into the program will not be liable for interest and penalties on the taxes paid and will not be subject to an employment tax audit for worker classification of the workers for the prior years. The employer must agree to extend the period of limitations on assessment of employment taxes for three years for the first three calendar years after the date on which the taxpayer has agreed under the VCSP closing agreement to begin treating the workers as employees.

The IRS is offering these favorable terms to incent employers to resolve worker classification issues as early as possible without incurring the costs of an audit. Companies that recognize their potential exposure from an audit should seriously consider applying for the VCSP.