IRS Relief to Companies that Have Misclassified Employees as Independent Contractors

By: Christopher Crouthamel

Employee or independent contractor? That is the question. Lately, how companies classify workers is a hot button issue for the Internal Revenue Service (IRS).  The IRS is making a concerted effort to go after businesses that have erroneously misclassified workers as independent contractors by conducting audits for current and prior years, which is proving to be extremely inconvenient and costly to the companies in question.  Recently, a new twist to this issue emerged as the IRS introduced the Voluntary Classification Settlement Program (VCSP).  The VCSP is a voluntary program that provides an opportunity for companies to prospectively reclassify their workers as employees rather than independent contractors, resolving their non-compliance classification issue without incurring substantial costs and without being subject to an audit.  To participate in this new voluntary program, the company in question must meet the following eligibility requirements:

1. The company must have consistently treated the workers as independent contractors
2. The company must have filed all required Forms 1099 for the independent contractors to be reclassified under the VCSP for the previous three years
3. The company cannot currently be under audit by the IRS
4. The company cannot currently be under audit concerning the classification of workers by the Department of Labor or by a state government agency

A company that meets these eligibility requirements and wishes to participate in the VCSP must apply by filing Form 8952, Application for Voluntary Classification Settlement Program.  The application should be filed at least 60 days prior to the date the company wants to begin treating the workers in question as employees.  A company accepted into the VCSP will enter into a closing agreement with the IRS to finalize the terms of the VCSP.  Once the terms are finalized, the company will:

1. Prospectively treat the workers as employees, not independent contractors
2. Pay 10% of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year, determined under the reduced rates of section 3509(a) of the Internal Revenue Code
3. Not be liable for any interest and penalties on the liability
4. Not be subject to an employment tax audit with respect to the worker classification of the workers being reclassified under the VCSP for prior years

For more information about this issue, please visit the VCSP Frequently Asked Questions page at www.irs.gov or feel free to contact our office.