On September 21, 2011, the Internal Revenue Service ("IRS") launched a new Voluntary Classification Settlement Program ("Program") by which employers can voluntarily report misclassified workers and convert them from independent contractors to employees in exchange for a much reduced tax payment and freedom from employment tax audits regarding that job classification for all prior years.
To be eligible for the Program, an employer must meet the following criteria:
- The employer must be treating the workers as nonemployees.
- The employer must have consistently treated the workers as nonemployees, i.e., the employer cannot have converted them from employees to contractors at some point in the past and the employer must have filed all required Form 1099s for the workers for the past three years.
- The employer must not be undergoing a current IRS or Department of Labor ("DOL") audit, in a current dispute with the IRS or DOL regarding the status of the workers, or if previously audited, must be in compliance with the requirement of the prior audit.
To participate in the Program, an eligible employer must file Form 8952 with the IRS at least 60 days before it intends to reclassify the workers and agree to do the following:
- Reclassify all workers in the same classification as employees — the Program is not available for employers who want to reclassify just certain individuals in a particular classification.
- Pay a substantially reduced tax payment — 10.68 percent of the workers' compensation for 2010 if the conversion occurs in 2011 and 10.28 percent of the workers' compensation for 2011 if the conversion occurs in 2012 — but without any corresponding penalties or interest.
- Agree to extend the normal three-year statute of limitations on the assessment of employment taxes by an additional three years, to a total of six years, for each of the three years that begin after the employer starts treating the workers as employees.
If the IRS determines that the employer is eligible for the Program, the IRS will contact the employer and enter into a closing agreement that contains the foregoing terms. Once that occurs, the employer will not be subject to an employment tax audit regarding the subject classification for any prior years.
The Program offers an opportunity to correctly reclassify workers and cap an employer's potential exposure to employment tax liability and thereby avoid much greater costs if the misclassification is discovered during an IRS or DOL audit which — given the IRS' and the Department of Labor's expressed intent to vigorously pursue claims of worker misclassification — are becoming more frequent.