Wrongfully Reporting Employees? The IRS Has a New Solution

The IRS recently made an announcement outlining the new Voluntary Classification Settlement Program, or VCSP. Hence the name voluntary, eligible businesses are going to have the opportunity to sign up for this program.

What exactly is the purpose of the program?

It is to help eliminate the confusion between classifying workers as employees or independent contractors. Outlining that if an employer has the right to control how a worker performs services, then that worker is considered an employee. The employer is then responsible for withholding FICA and income taxes, as well as matching FICA.

What are the benefits in complying?

Employers will only have to pay 10% of the liability of employment taxes for the current year. These payments will not be subject to penalties or interest. The IRS will not conduct an audit in regard to worker classification for prior years. Also, the employment tax for the most recent year is at a reduced rate of 20% of the normal FICA tax for employees that were misclassified. It is doubled to 40% for willful neglect.

What are the qualifications to participate?

The employer has to send in an application (form 8952) which is essentially an agreement to classify their workers, who are currently considered independent contractors, as employees. This form must be filed at least 60 days prior to treating independent contractors as workers. They also must agree for three calendar years from the year after the agreement to extend the period of limitations on assessment of employment taxes. They cannot currently be under audit at the state or federal level for the purpose of employment classification. Also, they had to have filed the proper 1099-MISC for all misclassified workers for the past three years.

In essence this program is giving businesses the ability to admit that they have been wrongfully misclassifying workers and agree to report them correctly with a few added benefits to entice them. The following link contains more information: Announcement 2011-64.