IRS Announces Voluntary Worker Classification Settlement Program ("VCSP")

Past Payroll Tax Relief Provided to Employers Who Reclassify Their Workers

employeesThe Internal Revenue Service launched a new program on September 21, 2011 giving many employers an affordable option to resolve past and present worker classification issues by voluntarily reclassifying their independent contractor or nonemployee workers as employees.  The Vountary Classification Settlement Program (“VCSP”) is part of a broader IRS “Fresh Start” initiative.  “This settlement program provides certainty and relief to employers in an important area,” said IRS Commissioner Doug Shulman. “This is part of a wider effort to help taxpayers and businesses to help give them a fresh start with their tax obligations.”

The new VCSP is designed to achieve tax compliance while also reducing the financial impact on employers.  The program is intended to provide greater certainty for employers, workers and the government.  Under the program, eligible employers can obtain relief from federal payroll taxes they may owe for the past tax years on the condition that they treat workers as employees going forward. The VCSP is available to sole proprietorships, joint ventures, partnerships, C corporations, S corporations, tax-exempt organizations and both state and local government entities that erroneously treat their workers as nonemployees or independent contractors that now want to properly treat these workers as employees.

Eligibility to Participate in the VCSP

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;
  • Not currently be under audit by the Department of Labor or a state agency concerning the classification of these workers
  • Agree to treat its workers as employees for future tax periods;
  • Pay 10% of the employment tax liability that woud have been due with respect to compensation paid to the workers for the most recent tax year, determined under the reduced rates of Section 3509 of the Internal Revenue Code;
  • Extend the statute of limitations on assessment of employment taxes for three years for the first, second, and third calendar years beginning after the date on which the taxpayer has agreed to begin treating its workers as employees under the VCSP.

Benefits of Participation in the VCSP

If a business is accepted into the VCSP, it will not be liable for interest or penalties with respect to the employment taxes they agree to pay the IRS.  Furthermore, the business will not be subject to a payroll tax audit by the IRS with respect to the reclassified workers for prior tax years.  Employers accepted into the program will pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers for the past year.

An Opportunity That Raises Questions

The VCSP program clearly offers employers an opportunity to come into compliance and avoid the harrowing penalties associated with a payroll tax audit.  However, what impact will this retrospective classification have on retirement, health or other benefit claims?  Does the reclassification extend the right to bring retroactive claims previously not available to a nonemployee?  Will California follow suit with a sister program as they did with the Voluntary Tax Compliance Initiative?  If not, will participation in the federal program volunteer a business for an audit by the California Franchise Tax Board?
The most important question is whether this program is a good fit for your business.  Please give us a call to discuss your options – 415-781-4000.