Worried that Your Independent Contractors Are Really Employees? A New IRS Program May Help

The Internal Revenue Service (IRS) recently launched a new amnesty program, the Voluntary Classification Settlement Program (VCSP), for employers who may have misclassified their workers as independent contractors rather than employees. Under the new program, employers who voluntarily reclassify their workers as employees can avoid an IRS audit and settle past payroll tax obligations by paying just a portion of what is owed.

To be eligible for the VCSP, employers must:

• consistently have treated the workers in question as independent contractors
• have filed all required Form 1099s for the workers for the previous three years, and
• not currently be audited by the IRS, the Department of Labor, or a state agency concerning the classification of the workers.

Employers accepted into the VCSP will have to pay an amount equaling a little over 1% of the wages paid to the misclassified workers for the past year. (A bargain if you keep in mind that assessments for misclassification can run as high as 40% of gross payroll or more.) No interest or penalties will be due, and participating employers will not be audited on payroll taxes related to the misclassified workers.

Employers interested in the amnesty program can apply by filing Form 8952 (Instructions). For more information about the VCSP, visit the Employment Taxes pages of IRS.gov or read IRS Announcement 2011-64.

Detailed information on classifying workers correctly and avoiding problems with the IRS can be found in Working With Independent Contractors, by Stephen Fishman (Nolo).