Alert: IRS Announces New Low-Cost Settlement Program for Worker Classification Issue

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October 7, 2011

On September 21, 2011, the IRS launched a new initiative on Voluntary Classification Settlement Program (VCSP) designed to increase tax compliance and reduce the burden for employers by providing a “fresh start” for employers on the tricky issue of employee and/or independent contractor classification. Under the program, eligible employers can obtain substantial relief from past federal payroll taxes that have been owed, if they prospectively treat workers as employees. The VCSP is available to employers that currently erroneously treat the workers or a class or group of workers as nonemployees or independent contractors, who now want to correctly treat these workers as employees.

The controversy is whether a worker is deemed an independent contractor or an employee. This determination depends on specific facts including how much control or direction a company exerts over workers. The common-law standard involving 20 factors is the current law. The problem for employers is that the difference between the two classifications is ambiguous. 

To be eligible, an applicant must:

  • consistently have treated the workers in the past as nonemployees;
  • filed all the required Form 1099s for the workers for the previous three years; and 
  • currently not be under audit by the IRS, the Department of Labor, or a state agency concerning the classification of the workers.

Interested employers can apply for the program by filing Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before they want to begin treating the workers as employees.

A taxpayer who participates in the VCSP will agree to prospectively treat the class of workers as employees for future tax periods. In exchange, the taxpayer will pay 10 percent of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year, determined under the reduced rates of IRC Code § 3509 (which is an effective rate of a bit more than one percent); will not be liable for any interest and penalties on the liability; and will not be subject to an employment tax audit with respect to the worker classification of the workers for prior years. Additionally, a taxpayer participating in the VCSP will agree to extend the period of limitations on the assessment of employment taxes for the three years for the first, second, and third calendar years beginning after the date on which the taxpayer has agreed, under the VCSP closing agreement, to begin treating the workers as employees.

Further details, including FAQs, are available on the Employment Tax pages of the IRS website and in IRS Announcement 2011-64.

The Briggs and Morgan Tax practice group is experienced in employment tax classification disputes. For more information or to review your situation, please contact a member of our Tax section.