The IRS’s Voluntary Classification Settlement Program (VCSP) presents a golden opportunity for employers to resolve past worker classification issues at an exceptionally low cost before an audit occurs. Under the VCSP, an employer would pay 10% of the amount of employment taxes calculated under the reduced rates of §3509 for compensation paid for the most recent tax year to the workers being reclassified – effectively equaling just over 1% of the wages paid to the reclassified workers for the past year. Importantly, an employer participating in the VCSP will not be liable for any penalties and interest, and will not be audited on payroll taxes related to these workers for prior years.

To be eligible for the VCSP, an employer must:

• consistently have treated the workers as independent contractors or other nonemployees;
• have filed all required Forms 1099 for the workers for the past three years; and
• not currently be under audit by the IRS, the U.S. Department of Labor or a state agency concerning the classification of these worker.

The VCSP is open to all employers, including tax exempt organizations and state and local governmental agencies. The VCSP is not available to state and local government employers for workers covered under a so-called “§218 agreement,” but is available for state and local government employers for workers not provided Social Security coverage under a §218 agreement. In addition, an exempt organization that is currently under a Form 990 series audit is considered to be “under audit” and thus may not participate.

To participate in the VCSP the employer must apply using Form 8952, Application for Voluntary Classification Settlement Program. The application should be filed at least 60 days before the date that the employer wants to begin treating its workers as employees. For example, to begin treating workers as employees for the first quarter of 2012, Form 8952 should be filed by November 2, 2011. Accepted employers must enter into a closing agreement with the IRS to finalize the terms of the VCSP, at which time full and complete payment of any amount due under the closing agreement must occur.

Employers should seriously consider participating in the VCSP given the IRS’s ongoing efforts to step-up scrutiny of worker classification through its 2010 employment tax audits as part of its National Research Program (NRP), and its September 19, 2011 memorandum of understanding with the Department of Labor to share information and other materials regarding employee misclassification.

More information regarding the VCSP is available on the IRS’s website at http://www.irs.gov/newsroom/article/0,,id=246203,00.html?portlet=7.  

Ken Savell, Tax Law Editor (IRS Practice and Procedure Group)