Voluntary Classification Settlement Program

by | Nov 28, 2011 | General | 0 comments

On September, the U.S. Department of Labor (DOL) and Internal Revenue Service (IRS) announced an effort to “end the business practice of misclassifying employees” as independent contractors or subcontractors in order to reduce labor costs. The collaboration also includes labor commissioners from 11 states: Connecticut, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, Missouri, Montana, New York, Utah and Washington.

The IRS also announced the Voluntary Classification Settlement Program (VCSP.) This allows employers to voluntarily reclassify workers as employees for federal tax purposes. Through the VCSP, employers will be able to pay a reduced tax lability for the misclassification of employees as opposed to current law penalties of back taxes and interest. Employers will need to meet other requirements to be eligible for the program and it is likely they will see stepped up enforcement going forward.

To be eligible for the VCSP, an applicant must have treated the workers consistently in the past as nonemployees, have filed all required Forms 1099 for the workers for the previous three years and not be under audit by the IRS, the U.S. Department of Labor or a state agency concerning the classification of these workers.

Interested employers can apply for the program by filing Form 8952, “Application for Voluntary Classification Settlement Program,” at least 60 days before they wish to begin treating the workers as employees. Employers accepted into the program will pay an amount in effect equaling just over 1 percent of the wages paid to the reclassified workers for the past year. No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years, according to the government.