The Ups and Downs of the Program for Voluntarily Reclassifying Your Workers

by Glen Frost on Oct. 21, 2020

Tax Tax  Corporate Tax Tax  Tax Litigation 

Summary: Whether a worker is properly classified as an employee or as an independent contractor depends upon the facts and circumstances. Generally, the determination is made under common law tests considering the right to control and direct the individual performing services. However, in some factual situations, the determination of the proper worker classification status may not be clear.

Whether a worker is properly classified as an employee or as an independent contractor depends upon the facts and circumstances. Generally, the determination is made under common law tests considering the right to control and direct the individual performing services. However, in some factual situations, the determination of the proper worker classification status may not be clear.

In 2011, the IRS introduced the Voluntary Classification Settlement Program (“VCSP”) as something of a “fresh start” for businesses that may have misclassified their workers as independent contractors. The VCSP allows some taxpayers to voluntarily reclassify workers as employees in future tax periods and limits federal employment tax liability for misclassification.

Eligibility under the VCSP requires that the taxpayer must have consistently treated the workers as non-employees, and have filed all required Forms 1099 for the previous three years with respect to the workers to be reclassified. Additionally, the taxpayer must not currently be under IRS audit or be currently under audit concerning the classification of the workers by the Department of Labor or by a state government agency.

Eligible taxpayers who want to participate in the VCSP must apply using Form 8952, Application for Voluntary Classification Settlement Program (VCSP). If the IRS, in its discretion, accepts the application, then the taxpayer will:

  1. 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. not be liable for interest and penalties; and
  3. not be subject to an employment tax audit with respect to misclassification for prior years.

While the benefits of qualifying for the program seem obvious, there are at least two potential drawbacks to consider. First, the IRS does not have to accept the application. Once the application is submitted, the IRS becomes very aware that the business may be misclassifying its workers. If the IRS, in its discretion, does not accept the application, the business may be targeted for further investigation, potentially leading to liabilities. Secondly, the VCSP only protects the business from the IRS. The IRS is not precluded from sharing information with the Department of Labor, and there are no similar protection programs with the Department of Labor.

Announcement 2012-45, 2012-51 I.R.B. 724, modifying and superseding Announcement 2011-64, 2011-41 I.R.B. 503.

If you have questions about the VCSP or any other related employment tax questions, contact Frost Law today at 410-497-5947.

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