IRS has established a new Voluntary Classification Settlement Program that allows employers to voluntarily re-classify workers as employees for federal employment tax purposes. Under the program, an employer agrees to (i) treat the workers as employees for future tax periods, and (ii) pay an amount equal to 10% of the employment tax liability that may have been due on the wages paid to such workers for the most recent tax year. In exchange, no interest or penalties will apply, and the employer will not be audited on payroll taxes with respect to the classification of such workers for prior years.
To be eligible, an employer must have consistently treated the workers as nonemployees, have filed all required Forms 1099 for such workers for the past three years, and not be under audit by the IRS, or under audit regarding the classification of workers by the Department of Labor or a state agency. Applications should be filed at least 60 days prior to the date an employer begins treating their workers as employees. Employers should consider possible exposure to Department of Labor and private actions before applying for the program.