IRS Voluntary Classification Settlement Program (VCSP)

Updated 4/2/2013

The Internal Revenue Service offers a program that provides eligible employers with the opportunity to reclassify some or all of their workers from non-employees or independent contractors to employees (for employment tax purposes).

The Voluntary Classification Settlement Program (VCSP) offers partial relief from past federal employment tax obligations – if the employer prospectively treats the workers as employees.

Note: As of publication, only the IRS is offering this federal tax relief. It is unclear whether state or local tax agencies will offer similar relief or whether the Federal DOL and state labor departments will provide relief of wage and hour violations related to worker classification. Employers are encouraged to seek professional assistance including consultation with legal counsel to evaluate the benefits and consequences of participating in the VCSP and the potential impact on their business.

Eligibility

According to the IRS website, to participate in the VCSP employers must meet the eligibility requirements, complete the application process and upon acceptance, enter into a closing agreement with the IRS and make full and complete payment of any amount due under the closing agreement.

To be eligible to apply for the VCSP, an applicant must:

  • Have consistently treated the workers in the past as non-employees,
  • Have filed all required Forms 1099 for the workers for the previous three years, and
  • Not currently be under audit by the IRS, the Department of Labor, or a state agency concerning the classification of these workers. If the IRS or the Department of Labor has previously audited a taxpayer concerning the classification of the workers, the taxpayer will be eligible only if the taxpayer has complied with the results of that audit and is not currently contesting the classification in court.

Application Process

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.

Employers accepted into the program will agree to prospectively treat the class of workers as employees for future tax periods. The employer:

  • Will pay 10 percent of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year, as determined at the reduced rates of section 3509(a) of the Internal Revenue Code, with no liability for any interest or penalties,
  • Will not be subject to an employment tax audit with respect to the classification of the workers for prior years, and
  • For the first three years under the program, will be subject to a special six-year statute of limitations, rather than the usual three years that generally applies to employment taxes.

Recent Update – VCSP – Temporary Eligibility Expansion (VCSP TEE)

In February of 2013, the IRS announced a temporary expansion of the eligibility requirements for a modified program called the Voluntary Classification Settlement Program – Temporary Eligibility Expansion (VSCP TEE). The VCSP TEE makes a modified VCSP available to taxpayers who would otherwise be eligible for the current VCSP, but who have not filed all required Forms 1099 for the previous three years with respect to the workers to be reclassified. The VCSP TEE allows more taxpayers, particularly larger ones, an opportunity to take advantage of this program. The relief under the VCSP TEE is similar to the VCSP, although the payments are generally higher.

The VCSP TEE will be available through June 30, 2013.

Applying for VCSP TEE

Eligible taxpayers who want to participate in the VCSP TEE must submit Form 8952, Application for Voluntary Classification Settlement Program (VCSP), on or before June 30, 2013. When applying for the VCSP TEE, applicants must follow certain procedures outlined by the IRS, see: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Voluntary-Classification-Settlement-Program   

Employers accepted into the VCSP TEE will agree to prospectively treat the class or classes of workers as employees for future tax periods. They will also have to furnish Forms 1099 for the workers being reclassified for the previous three years, and electronically file all required Forms 1099 for those workers. In exchange, the taxpayer will:

  • Pay 25 percent of the employment tax liability that would have been due on compensation paid to the workers for the most recent tax year, determined under the reduced rates of section 3509(b) of the Internal Revenue Code;
  • Not be liable for any interest and penalties on the liability;
  • Pay a reduced, graduated penalty for unfiled Forms 1099 for the previous three years for the workers being reclassified (see the worksheet provided with Announcement 2012-46, 2012-51 I.R.B. 725); and
  • Not be subject to an employment tax audit with respect to the worker classification of the workers being reclassified for prior years.

Resources

For further information on the VCSP, including the revised modifications, the application process and FAQs, visit:

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Voluntary-Classification-Settlement-Program.

Additional information on the VCSP can be found in the HR Compliance Library section of the Paychex Accountant Knowledge Center located at: http://www.paychex.com/accounting-professionals/resources/knowledge-center/ and search: VCSP.

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