New Enforcement Efforts Aimed at Employee Misclassification; Employers May Avoid Payroll Tax Penalties with Voluntary Reclassification
The U.S. Department of Labor (DOL) has entered into a series of agreementswith the Internal Revenue Service (IRS), as well as several state labor commissioners and other department leaders, which will enable those agencies to share information and coordinate law enforcement to end the business practice of misclassifying employees in order to avoid providing employment protections.
Voluntary Classification Settlement Program
At the same time, the IRS has launched a new program that will enable many employers to resolve past worker classification issues and achieve certainty under the tax law at a low cost by voluntarily reclassifying their workers. TheVoluntary Classification Settlement Program (VCSP) will allow employers the opportunity to come into compliance by making a minimal payment covering past federal payroll tax obligations rather than waiting for an IRS audit.
Who is eligible to participate in the program?
The VCSP is available to many businesses, tax-exempt organizations and government entities that currently erroneously treat their workers or a class or group of workers as nonemployees or independent contractors, and now want to correctly treat these workers as employees.
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 3 years.
- Not currently be under audit by the IRS, the DOL or a state agency concerning the classification of these workers.
How does the program work?
Employers accepted into the program will pay an amount effectively equaling just over 1% of the wages paid to the reclassified workers for the past year. No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years. Participating employers will, for the first 3 years under the program, be subject to a special 6-year statute of limitations, rather than the usual 3 years that generally applies to payroll taxes.
How can employers apply for the program?
Interested employers can apply for the program by filing Form 8952,Application for Voluntary Classification Settlement Program, at least 60 days before they want to begin treating the workers as employees.
Where can I find more information?
Full details on the Voluntary Classification Settlement Program, includingFAQs, are available on IRS.gov by clicking here, and in Announcement 2011-64. To read more about the latest enforcement efforts by DOL and the IRS, please click here. Our section on Independent Contractors - How to Classifyfeatures important information and tips on how to properly classify your workers.