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IRS recently announced its initiative to help taxpayers and businesses address their employment tax responsibilities through a new Voluntary Classification Settlement Program (“VCSP”). The VCSP provides partial relief from federal employment taxes to employers who agree to prospectively treat workers as employees.
The VCSP is available for employers who want to voluntarily change the prospective classification of their workers from independent contractors to employees. To be eligible for the program, the employer: (1) must have consistently treated the workers as independent contractors and filed all required Forms 1099 for the previous three years; and (2) must not currently be under audit by the IRS, the Department of Labor or by a state governmental agency. If the employer was previously audited by the IRS or the Department of Labor with respect to worker classification, the employer is eligible for the VCSP only if the employer has complied with the results of that audit.

In exchange for participating in the VCSP, the employer: (1) will pay 10% of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year; (2) will not be liable for any interest and penalties on the employment tax liability paid; and (3) will not be subject to an employment tax audit with respect to the classification of the workers for prior years. The employer must also agree for the next three years following participation in the VCSP to extend the statute of limitations on assessment of employment taxes for an additional three years.

This voluntary program applies only to IRS and not to the Department of Labor or other state taxing authorities. Further, the Department of Labor and certain states may be notified of the change in classification of the workers. Such notification may result in liability exposure to the employer for misclassification violations – e.g., back benefits, wage hour, and workers’ compensation violations.