September 28, 2011
Authored by: Serena Yee
The Internal Revenue Service (“IRS”) recently announced a new settlement program for employers with misclassified workers. Under the Voluntary Classification Settlement Program (“VCSP”), employers can get a significant reduction in their federal employment tax liability associated with past nonemployment treatment by agreeing to properly classify their workers for future tax periods. This announcement comes on the heels of recent announcements that the IRS, Department of Labor (“DOL”) and various state agencies are collaborating on examining worker misclassification issues.
The VCSP is generally available to employers who want to voluntarily change the prospective classification of their misclassified workers from independent contractors (or other nonemployee status) to employees. To be eligible, the employer must have consistently treated the workers as nonemployees and for the three previous three years filed all required Forms 1099 for such workers. Further, the employer cannot be under audit by the IRS or by the DOL or a state government agency concerning the classification of the workers. An employer who has been previously audited by the IRS or DOL concerning the classification of workers is eligible for the VCSP only if it has complied with the results of that audit.
In exchange for agreeing to prospectively treat the class of workers as employees for future tax periods, the employer will pay only 10% of the employment tax liability that otherwise would have been due on the compensation paid to the workers for the most recent tax year, but determined under the reduced rates of Section 3509 of the