IRS Offers Employers Tax Relief through VCSP Program

January 11, 2012

IRS Offers Employers Tax Relief through VCSP Program

The IRS recently announced a new program–the Voluntary Classification Settlement Program (VCSP)–that offers employers partial relief of potentially significant tax, penalties and audit costs for prior years’ misclassification of their workers as independent contractors.

Independent Contractor Classification 
Since employers do not have to withhold income tax or pay Social Security or Medicare tax on their wages, they sometimes classify workers as independent contractors. That classification, however, requires meeting 20 standards that can be vague, and many workers are believed to be misclassified. The employer can face significant costs and tax liabilities, including interest and significant penalties, if the IRS and/or the Department of Labor conduct a classification audit and find that the standards have not been met. 
   
VCSP Benefits 
Through VCSP, employers who treat workers as independent contractors can avoid exposure to potentially significant tax and audit costs for prior years. To comply they are required to voluntarily change their workers’ classification to employees and pay 10% of the employment tax (about 1% of affected wages) that might have been due for the most recently completed year. Eligible employers must have consistently treated their workers as nonemployees for the past three years.

How to Participate

Employers can learn more about VCSP on the IRS website, including program FAQs. To participate, the employer should apply through Form 8952, Application for Voluntary Classification Settlement Program, and also provide the name of a contact through Form 2848.