The Internal Revenue Service (“IRS”), has announced the launch of a new programed designed to allow employers to correct employee classification errors with a significantly reduced tax liability for any prior classification errors. The Voluntary Classification Settlement Program (“VCSP”), is available to many businesses, tax-exempt organizations and government entities have erroneously treated their workers or a class or group of workers as non employees or independent contractors, and now want to correctly treat these workers as employees.
An employer who participates in the VCSP agrees to treat the class or classes of workers as employees for future tax periods for employment tax purposes and will not be subject to an employment tax audit with respect to the worker classification of the workers for prior years. The VCSP permits taxpayers to reclassify some or all of their workers. However, once a taxpayer chooses to reclassify certain of its workers as employees, all workers in the same class must be treated as employees for employment tax purposes.
To be eligible for the VCSP, an employer must: (1) consistently have treated the workers in the past as non employees, (2) have filed all required Forms 1099 for the workers for the previous three years, and (3) not currently be under audit by the IRS, the Department of Labor or a state agency concerning the classification of these workers. An employer who was previously audited by the IRS or the Department of Labor concerning the classification of the workers will only be eligible if they complied with the results of that audit.
In order to participate in the VCSP, an eligible employer must complete and submit an application, using Form 8952, Application for Voluntary Classification Settlement Program (which will be available in early October). Taxpayers may access the application by using the following link, Form 8952, Application for Voluntary Classification Settlement Program. The application should be filed at least 60 days from the date the taxpayer wants to begin treating its workers as employees. Along with the application, the name of a contact or an authorized representative with a valid Power of Attorney (Form 2848) should be provided.
Once submitted, the IRS will review the application and, if accepted, will permit the taxpayer to enter into a VCSP closing agreement. Employers accepted into the program will pay 10% of the amount of employment taxes calculated under the reduced rates of section 3509 of the Internal Revenue Code for the compensation paid for the most recent tax year to the workers being reclassified under the VCSP. No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years. In addition, the taxpayer will extend the period of limitations on the assessment of employment taxes for three years for the first, second and third calendar years beginning after the date the taxpayer has agreed to begin treating the class or classes of workers as employees. In order to receive the protections granted under the VCSP, taxpayers must make full and complete payment of any amount due under the VCSP when they return the signed VCSP closing agreement to the IRS.
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