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Voluntary Classification Settlement Program

August 23, 2017

On September 21, 2011 the IRS announced a new program for reclassification of Independent Contractors to Employees allowing businesses to gain more control over the Contractors that are currently providing services to their business.

The VCSP program is a settlement program that is designed to provide relief to employers who were incorrectly treating workers as Independent Contractors.  The tax relief or “fresh start” initiative allows employers to become compliant and make minimal tax payments on past payroll tax obligations rather than waiting for a possible IRS audit.  Under this program employers can receive substantial relief from federal (941) payroll taxes they have owed for workers misclassified as nonemployees.  Eligible employers must file Form 8952 and follow these guidelines:

  • Employer must not currently be under audit with the IRS, Department of Labor or state agency concerning the classification of these workers
  • Employer must have filed Forms 1099 for workers for the past three years
  • Employer must have previously treated the workers as nonemployees on a consistent basis

However, consider these additional tax issues once your business is accepted into the VCSP program:

  • Some state agencies are not legally required to absolve employers of liability for unpaid state withholding or unemployment taxes due as a result of the misclassification.
  • A misclassified worker may not be aware of the reclassification once the employer enters into the program since there is no current requirement for an employer to notify the worker.  It is possible that a worker could receive an Employee W2 Wage and Tax Statement and a Form 1099 MISC statement for wages paid by the employer.

If your business issues 1099 MISC forms to Independent Contractors, it is important that your classification is correct.  If you need help in determining whether the worker should be an Independent Contractor or W2 employee, please refer to the IRS.