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Voluntary Worker Classification Settlement Program

September 30, 2011
By: Suzanne A. Prybella

The IRS has launched a new program that will enable many employers who have been classifying their workers as independent contractors instead of employees to obtain substantial relief from federal payroll taxes that could otherwise be assessed on audit.  The new Voluntary Classification Settlement Program (VCSP) allows eligible employers to compromise their exposure if they (1) elect to treat workers in the future as employees and (2) make a minimal payment of 10% of the employment tax liability that would have been due on compensation paid to the reclassified workers for the most recent tax year.  The VCSP is available to many businesses, tax-exempt organizations and government entities that currently treat workers (or a class or group of workers) as non-employees or independent contractors, and now want to correctly identify these workers as employees. The IRS has stated that it will be more vigilant about the misclassification of workers in the future, so the time to take advantage of the VCSP is now.

Voluntary Classification Settlement Program

An employer who participates in the VCSP will agree to prospectively treat the reclassified workers (or group or class of workers) as employees for future tax periods.  Under the program, the employer will pay 10% of the employment tax liability that would have been due on compensation paid to the reclassified workers for the most recent tax year.  The employer will not be liable for any interest and penalties on the liability, nor will the employer be subject to an employment tax audit with respect to the worker classification of the reclassified workers for prior years.  In addition, participating employers will, for the three years following participation in the program, be subject to a special six-year statute of limitations rather than the usual three-year statute of limitations that generally applies to payroll taxes.

Eligibility

The VCSP is available for employers who want to voluntarily change the prospective classification of their workers from independent contractor to employee.  In order to be eligible, an employer:

  • must have consistently treated the reclassified workers (or a class or group of workers) as non-employees.
  • must have filed all required 1099 forms for the reclassified workers for the previous three years.
  • cannot currently be under audit regarding the classification of workers by the IRS, the Department of Labor or any state government agency.  An employer who was previously audited regarding the classification of the reclassified workers will only be eligible if the employer has complied with the results of that audit.

Application Procedure

Eligible employers who wish to participate in the VCSP can apply by filing Form 8952 - Application for Voluntary Classification Settlement Program - at least 60 days before they want to begin treating the workers as employees.  Along with the application, the employer should also provide the name of a contact person or authorized representative with a valid Power of Attorney (Form 2848, Power of Attorney and Declaration of Representative).  The IRS will contact the employer or authorized representative to complete the process once it has reviewed the application and verified the employer’s eligibility.  An employer whose application has been accepted will enter into a closing agreement with the IRS to finalize the terms of the VCSP and will simultaneously pay any amount due under the program.

If you would like to discuss how any of these changes may affect your business or personal income tax situation, or have any other tax or estate planning questions, please contact, Scott Borsack (215.864.7048), Bill Hussey (215.864.6257), Kevin Koscil (215.864.6827) or Suzanne Prybella (215.864.7188).

IRS Circular 230 Notice:  To ensure compliance with certain regulations promulgated by the U.S. Internal Revenue Service, we inform you that any federal tax advice contained in this communication (including any  attachments) is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding tax-related penalties under the U.S. Internal Revenue Code, or (2) promoting, marketing or recommending to another party any tax-related matters addressed herein, unless expressly stated otherwise.

This correspondence should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and legal questions.
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