By Ken Berry
The Internal Revenue Service (IRS) is extending an olive branch to employers that may have misclassified "employees" as "independent contractors."
Under a new initiative announced by the IRS on September 21, 2011 (IR-2011-95
), employers can resolve – at a low cost – uncertainties relating to the employment status of workers by voluntarily reclassifying workers. The Voluntary Classification Settlement Program (VCSP) enables employers to avoid time-consuming and potentially expensive audits by paying small amounts to cover past payroll tax obligations.
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"Two features make the VCSP particularly attractive," says Kathy Mort, a managing director with PwC's Tax Controversy and Dispute Resolution department. "First, the cost of entering into an agreement under the VCSP is minimal and will make the program very appealing in many cases. For example, employers who are aware of potentially misclassified workers but have avoided reclassifying them prospectively because of the tax exposure such reclassification might cause for prior years, may seek an agreement under the VCSP. Additionally, the VCSP is structured so that participation in the program does not impact the affected worker's prior year income tax return."
The VCSP requires employers to prospectively treat workers as employees. It is generally available to businesses, tax-exempt organizations, and government entities that have mistakenly treated workers as nonemployees, including independent contractors. To qualify, an employer:
- Must have consistently treated the workers in the past as nonemployees;
- Must have filed all required Forms 1099 for the workers for the previous three years; and
- Cannot currently be under audit by the IRS, the Department of Labor, or any state agency concerning the classification of the workers.
An employer may apply for the VCSP by filing Form 8952
, Application for Voluntary Classification Settlement Program, at least sixty days before it begins treating the workers as employees. Once an employer is accepted into the program, it must pay an amount effectively equal to slightly more than 1 percent of the wages paid to reclassified workers for the prior year. No interest or penalties will be due, and the employers will not be audited on payroll taxes relating to those workers for prior years. For the first three years in the program, participating employers are subject to a six-year statute of limitations instead of the usual three-year period that generally applies to payroll taxes.