The IRS recently announced that it has expanded its Voluntary Classification Settlement Program (VCSP) to allow more taxpayers to reclassify their workers as employees for future tax periods. The VCSP offers substantial relief from federal payroll taxes to eligible employers who have been treating their workers (or a class or group of workers) as independent contractors or otherwise as nonemployees and now wish to begin treating them as employees. It does not affect state payroll tax, state unemployment insurance (SUI) tax, or workers’ comp obligations.
Under the expanded program, employers under IRS audit (other than an employment tax audit) can still qualify for the VCSP. To be eligible to participate in the VCSP, an employer must currently be treating the workers as nonemployees; consistently have treated the workers in the past as nonemployees, including having filed any required Forms 1099 (see below for a special limited-time exception to this requirement); and not be currently under audit on payroll tax issues by the IRS or on worker classification issues by the Department of Labor or a state agency.
Normally, employers are barred from the VCSP if they failed for the past three years to file required Forms 1099 for the workers they are seeking to reclassify. However, the IRS is waiving this eligibility requirement for taxpayers who come forward before June 30, 2013. Contractors not previously eligible for the VCSP due to their failure to file Forms 1099 should decide quickly whether to take advantage of this brief window of opportunity to clean up their worker classification practices before they find themselves in the same boat as the GC in Kurek.
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 generally 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.
Employers accepted into the program no longer will be subject to a special six-year statute of limitations on such reclassifications; instead, they will come under the three-year statute that usually applies to payroll taxes. Employers that failed to file Forms 1099 may also apply for the temporary relief program, but they likely will pay a slightly higher amount (including some penalties) and will need to file any unfiled Forms 1099 for the workers they are seeking to reclassify as employees.