On February 27, 2013, the Internal Revenue Service (IRS) announced its expansion of the Voluntary Classification Settlement Program (VCSP) to allow more employers to achieve certainty under the law by reclassifying their workers as employees for future tax periods.
The VCSP is beneficial for some employers because it allows employers to voluntarily reclassify their workers as employees for future tax periods, while only paying 10 percent of the amount of employment taxes that would have been due on compensation paid to the workers being reclassified for the most recent tax year, calculated under reduced rates. In addition, the employer will not be liable for any interest and penalties on the payment under the VCSP, and will not be audited for employment tax purposes for prior years with respect to the employee classification of the workers.
Employers who want to take advantage of these benefits must generally meet certain requirements to be eligible for the VCSP. Specifically, an employer must be treating the workers to be reclassified as independent contractors or other nonemployees; additionally, the employer must have consistently treated the workers as nonemployees, including having filed any required Forms 1099, consistent with the nonemployee treatment, for the previous three years with respect to the workers to be reclassified. The employer cannot be currently under employment tax/payroll tax audit by the IRS. In addition, the employer cannot currently be under audit by the Department of Labor or a state agency concerning the classification of the workers or contesting the classification of the workers in court.
Under the revamped program, as stated above, employers under IRS audit, other than an employment tax audit, can qualify for the VCSP. Furthermore, employers accepted into the program will no longer be subject to a special six-year statute of limitations, rather than the usual three years that normally applies to payroll taxes. Please see the IRS’s announcement and questions and answers document for more information.
Normally, employers are barred from the VCSP if they failed to file required Forms 1099 with respect to workers they are seeking to reclassify for the past three years. However, for the next few months, until June 30, 2013, the IRS is waiving this eligibility requirement. Details on this temporary change are in this announcement.
Employers accepted into the program will generally pay an amount effectively equaling just over one 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. Employers applying for the temporary relief program available for those who failed to file Forms 1099 will pay a slightly higher amount, plus some penalties, and will need to file any unfiled Forms 1099 for the workers they are seeking to reclassify. In determining whether to participate, an employer must also consider labor and employment law and affordable care act law implications. Other laws may also impacted. Accordingly, obtaining advice from counsel before participating in the VCSP is essential.