The IRS has announced (Announcement 2011-64) a Voluntary Employee Classification Settlement Program (VCSP). This allows qualifying taxpayers to voluntarily enter into an agreement with the IRS concerning workers who have been treated as independent contractors, who should have, in fact, been classified as employees. The IRS has conducted a national research project on this issue. On September 16, 2011, the Department of Labor and the IRS entered into an agreement to share information between them to further pursue this issue of misclassification of workers.
To participate in this voluntary program, employers must submit an application and must agree to treat their workers, or a class or group of workers, as employees, and to withhold on them in future tax periods. The employers must also agree to extend the statute of limitations for assessment of employment taxes for each of the three calendar years beginning after the date of the agreement.
In exchange, employers will pay 10% of the employment tax liability due for the most recent year. There will be no interest or penalties assessed. Further, the IRS will not conduct an employment tax audit for the prior years. The tax liability will be calculated under the reduced rates provided by section 3509, which is 20% of the normal employee FICA tax. Employers must not currently be under audit by either the IRS, the Department of Labor, or any state agency relating to worker classification. Any employer who has been previously audited as to worker classification, must have complied with the results of the audit. Also, employers must have consistently treated the subject workers as non-employees, which means they must have filed all required forms 1099 in the previous three years.
The application to be filed is Form 8959 Application for Voluntary Classification Settlement Program. The form must be filed at least 60 days before beginning to treat the workers as employees.
The Announcement notes that the IRS “retains discretion” as to whether to accept the application. Accordingly, further evaluation of a taxpayer’s situation may be required. Further, consideration must be given to the impact of Florida’s unemployment tax liabilities. This may be an excellent opportunity for those individuals who are concerned about past treatment of workers, particularly in this environment of increased payroll tax audits and the IRS’s dedication of new resources to this issue.