New IRS Program Offers Employers Amnesty For Potential Worker Classification Issues09.23.2011
Proper classification of workers as employees or independent contractors is a regular concern for employers. Improper or mistaken classification could subject employers to back employment taxes, penalties, and interest. On September 21, 2011, the Internal Revenue Service (“IRS”) instituted the Voluntary Classification Settlement Program (“VCSP”), which offers employers who qualify an opportunity to resolve potential misclassification of their workers for federal employment tax purposes.
The VCSP is available to employers who currently treat workers or a group of workers as non-employees or independent contractors and want to correctly treat those workers as employees. To be eligible for this program, the employer: (1) must have consistently treated the workers as non-employees; (2) must have filed all required Forms 1099 for the workers for the previous three years; and (3) cannot be currently under audit regarding worker classification by the IRS, the Department of Labor or a state government agency.
The effect of participation in the VCSP will be prospective agreement to treat the class of workers as employees and in exchange to pay 10% of the employment tax liability that may have been due on compensation paid those workers for the most recent tax year determined under the reduced rate of section 3509 of the Internal Revenue Code. Importantly, the employer will not be liable for any interest or penalties on the tax liability and will not be subject to any employment tax audit with respect to worker classification for prior years. The employer will also agree to extend the statute of limitations on assessments of employment taxes for three years for the first, second and third years beginning after the date the employer agrees under a closing agreement to begin treating the workers as employees. This means the statute of limitations on assessments will be six years for the first three years under the program rather than the usual three years on assessments applicable to payroll taxes.
To enter the VCSP, the employer must apply by filing Form 8952 at least sixty (60) days before it wants to treat its workers as employees. The employer should also provide a valid Power of Attorney (Form 2848). The IRS has discretion to accept or refuse the application. If the application is accepted, the employer and the IRS will enter into a closing agreement, and the employer will have to make full payment of any amount due under that agreement.
The VCSP offers employers an opportunity to eliminate potential exposure with regard to the classification of their workers. Musick Peeler is available to address any of your questions or concerns regarding this new program.
WARNING: The partial amnesty provided by this Program DOES NOT extend to other potential misclassification liabilities such as California and other state income taxes, payroll withholdings (examples are unemployment insurance and state disability insurance), wages and hours (examples are minimum wages, overtime, paystubs, and uniforms), benefit programs such as retirement plans and health insurance, workers’ compensation insurance, employment discrimination and harassment (common examples are race, color, national origin, sex, sexual orientation, religion, age, and disabilities), law-protected leaves of absences (common examples of such leaves are family, disability [including pregnancy and workers compensation], military, domestic abuse, drug and alcohol, jury, voting, literacy, attending school functions, and organ and bone marrow transplants), and wrongs caused by employee/agents. As a consequence, DO NOT discuss this topic of misclassification EXCEPT in the presence of your legal counsel, which, except for extraordinary circumstances, will protect such discussions through attorney-client privilege.
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