In the past, employers have often sought to reduce their federal taxes by classifying their workers as independent contractors instead of employees. The Internal Revenue Service (IRS) implemented the Voluntary Classification Settlement Program (VCSP) in 2011 to encourage employers to reclassify their workers as employees with partial relief from federal employment taxes. This program is meant to help address and resolve three issues faced by the IRS:
- Underpayment of income taxes by the worker
- Underpayment of employment taxes by the employer
- Past-due tax payments and increased agency administrative costs
The IRS has recently expanded the Voluntary Classification Settlement Program, extending the benefits for employees who participate.
Employers who have misclassified their workers as contractors instead of employees may face penalties for multiple years of delinquent employment taxes. The VCSP provides the relief that many employers need, since it costs less than the penalties that would result from an IRS audit. The recent changes to the VCSP increase its benefits and reduce its burdens, which had supposedly prevented employers from voluntarily joining the program before.
Eligibility Requirements for VCSP:
- The business is and has constantly been treating a worker as a non-employee;
- The business agrees to treat the non-employee as an employee prospectively;
- The business is not currently under audit by the IRS, the Department of Labor (DOL), or a similar state agency;
- The business must furnish all workers who are being reclassified as employees, as well as the IRS, with accurate Forms 1099 for the prior three years if they should have, but have not been filed;
- Any business that failed to furnish Forms 1099 as mentioned above must have submitted a VCSP application with the IRS on or before June 30, 2013; after this date, only businesses that furnished Forms 1099 as outlined above may qualify for the VCSP
- Pay only 25% of employment tax liability for the reclassified worker(s) for the most recent tax year at reduced employment tax rates (as opposed to three years of all federal employment taxes due at full rates);
- Pay a reduced penalty for failing to file Forms 1099 for the worker(s) for each of the three previous tax years for which no forms were filed;
- Avoid deficiency interest and other non-compliance penalties;
- Avoid an IRS worker classification audit