Press Room: Tax Release

December 01, 2011

Opportunity to Reclassify Independent Contractors

Employers have an opportunity to reclassify workers from independent contractor to employee status with a reduced tax liability under a new IRS settlement program. 

IRS launched a Voluntary Classification Settlement Program (VCSP) that allows an eligible employer to reclassify workers from independent contractor to employee status for future federal employment tax purposes. As an inducement to employers that participate in the program, IRS has offered a reduction in the amount owed for federal employment taxes as a result of past employee misclassifications.

To be eligible, a taxpayer: (1) must have consistently treated the workers as non-employees; (2) must have filed all required Forms 1099 for the affected workers for the previous three years; and (3) must not be under audit by IRS or must not be under audit concerning the classification of workers by the Department of Labor (DOL) or by a state government agency. A taxpayer who was previously audited by IRS or DOL is eligible only if it has complied with the results of that audit.

A taxpayer participating in the VCSP must agree to treat the workers as employees for future tax periods. In exchange, IRS has offered the following favorable settlement of past federal employment taxes:

  • amount owed for past periods will be reduced to 10% of the employment tax liability that would have been due on compensation paid to affected workers for the most recent tax year, determined under the reduced rates of Sec. 3509;[1]
     
  • liability for any interest and penalty on past tax liability will be waived; and
     
  • relief from an employment tax audit with respect to worker classification will be waived for prior years.

A condition of the settlement, the taxpayer must agree to a three-year extension of the statute of limitations on assessment of employment taxes for the first, second and third calendar years beginning after the date on which the taxpayer has agreed under the VCSP closing agreement to begin treating the workers as employees. 

A taxpayer has to apply on Form 8952, Application for Voluntary Classification Settlement Program, to participate in the VCSP. While Form 8952 can be filed at anytime, it must be filed at least 60 days prior to the date that the taxpayer wants to begin to treat the workers as employees.

WTAS can assist companies with evaluating the benefits of participating in the VCSP and with the required filing of Form 8952.

 

1 For 2010, the tax liability under Sec. 3509 is 10.68% for wages up to the Social Security wage base and 3.24% for wages in excess of the Social Security wage base.