The classification of a worker as an “independent contractor” or “employee” continues to be a significant issue for the IRS. To encourage the voluntary classification of workers as employees, the IRS created the Voluntary Worker Classification Settlement Program (VCSP) in 2011. The program’s goal was to facilitate the voluntary reclassification of workers as employees without the employer having to endure the examination process and the normal correction procedures or to incur extraordinary tax liability to become compliant.
An employer who participates in the VCSP must agree to prospectively treat a class of workers as employees for future tax periods. If an employer enters the VCSP, the employer would have the following benefits: a) the employer need only pay 10% of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year; b) the employer will not be liable for any interest and penalties on the employment tax liability; and c) the employer will not be subject to an employment tax audit with respect to the worker classification of the workers for prior years.
To be eligible for the VCSP, taxpayers must:
- have consistently treated the relevant workers as nonemployees;
- have filed all required Forms 1099 for the relevant workers for the previous three years;
- not be under audit (or have any members of the employer’s affiliated group be under audit) by the IRS for employment taxes; and
- not be contesting in court the classification of the class or classes of workers from a previous audit by the IRS or Department of Labor.
In 2012, the IRS announced a temporary eligibility expansion to the VCSP. If an employer would be eligible for the VCSP, but the employer did not file required Forms 1099 for the previous three years, the employer is eligible to enter into a modified VCSP through June 30, 2013. Under the modified VCSP, the employer must agree to: a) treat the relevant class of workers as employees; b) pay 25% of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year; and c) self-assess and pay a reduced non-filing penalty for the Forms 1099, which is generally $50 to $100 per unfiled Form 1099 (maximum $10,000).
In general, there is no deadline to enter the VCSP. However, if the temporary eligibility expansion applies to your company, and you deem it advisable to enter the VCSP, an application to enter the VCSP must be filed by June 30, 2013. You will need to act quickly. Feel free to contact a member of the McGrath North Tax Group to discuss your employment tax options in more detail.