The Internal Revenue Service (IRS) has launched a new programthat will enable many employers to resolve past worker classification issues and achieve certainty under the tax law at a low cost by voluntarily reclassifying their workers. The new program will allow employers the opportunity to come into compliance by making a minimal payment covering past payroll tax obligations rather than waiting for an IRS audit.

What is the Voluntary Classification Settlement Program?

The new Voluntary Classification Settlement Program (VCSP) is designed to increase tax compliance and reduce burden for employers by providing greater certainty for employers, workers and the government. Under the program, eligible employers can obtain substantial relief from federal payroll taxes they may have owed for the past, if they prospectively treat workers as employees.

Who is eligible to participate in the VCSP?

The VCSP is available to many businesses, tax-exempt organizations and government entities that currently erroneously treat their workers or a class or group of workers as nonemployees or independent contractors, and now want to correctly treat these workers as employees.

To be eligible, an applicant must:

  • Consistently have treated the workers in the past as nonemployees
  • Have filed all required Forms 1099 for the workers for the previous three years
  • Not currently be under audit by the IRS, the Department of Labor or a state agency concerning the classification of these workers

How does the VCSP work?

Employers accepted into the program will pay an amount effectively equaling just over 1% 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. Participating employers will, for the first 3 years under the program, be subject to a special 6-year statute of limitations, rather than the usual 3 years that generally applies to payroll taxes.

How can employers apply for the VCSP?

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.

Where can I find more information?

The Voluntary Classification Settlement Program is part of a larger "Fresh Start" initiative at the IRS to help taxpayers and businesses address their tax responsibilities. Full details, including FAQs, will be available on the Employment Taxes page of IRS.gov, and in Announcement 2011-64. For information on the proper classification of employees versus independent contractors, visit our section on Independent Contractors—How to Classify.

Topics: Human Resources, Recruitment and Hiring

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