The IRS has expanded its Voluntary Classification Settlement Program (VCSP) which allows employers to reclassify their workers and get partial relief from employment taxes.
The classification of a worker as an employee or an independent contractor is an important business and tax issue. Generally, an employer must withhold income taxes and pay unemployment tax, Social Security and Medicare tax on compensation paid to an employee. Withholding and taxes are not required to be made for independent contractors.
VCSP is a program that allows employers to reclassify their wrongly classified workers as employees for employment tax purposes, and get partial relief from employment taxes. To participate in the program, the employer must meet certain eligibility requirements and apply for participation by filing Form 8952 and enter into a closing agreement with the IRS. The employer must currently treat its workers as independent contractors or other non-employees and want to prospectively treat the workers as employees.
The IRS expanded VCSP by modifying its eligibility requirements. Now, more employers, including larger ones, can apply for the program. Businesses, tax-exempt organizations and government entities may qualify. The changes to the program allow employers under IRS audit, other than an employment tax audit, to qualify for the program. In addition, employers who participate in the program will no longer be subject to a special six-year statute of limitations on payroll taxes.
Generally, an employer is not allowed to participate in VCSP if the employer failed to file Forms 1099 with respect to workers they want to reclassify. Until June 30, 2013, the IRS is waiving this eligibility requirement and such employers can participate in VCSP. Employers who are accepted into the program will pay an amount equal to just over 1% of wages paid tot he reclassified workers for the past year. No interest or penalties are due, and the employer will not be audited on payroll taxes related to these workers for prior years. Employers who want to participate in the temporary relief program available for those who did not file Form 1099 will have to pay a slightly higher amount, plus some penalties and will have to file any previously unfilled Forms 1099 for the reclassified workers.
