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Honest Mistake or 'Payroll Fraud?' The Voluntary Classification Settlement Program Might Be Able to Help


When it comes to keeping company operations up and running, business owners like you may rely on a variety of programs and initiatives provided by local, state and federal governments. These programs aim to help your business and its various processes and procedures, whether these pertain to financial assistance, exporting products or expanding to new regions. Some of these initiatives may provide aid to your organization in the area of hiring and managing employees. With all of the regulations and laws regarding interviewing, onboarding and overseeing workers, as well as maintaining control over payroll processes and other related components, it makes sense that as a business leader, you would want to ensure you are in compliance with relevant requirements.

Get tax relief with help from the IRS

Even owners who have had their companies open for some time know that when it comes to all of the taxes and fees imposed by the government, the list seems endless. As stated above, the government regulates many processes, procedures and operational elements involved with running a business, and organizations need to be sure they're following laws effectively.  When managing employees, some of the most important areas of consideration  are payroll, maintaining control over wages, taxes and other financial elements. However, there's no one-size-fits-all approach to this, as companies hire a variety of workers, such as full-time and part-time employees, independent contractors, and other non-employees. These categories may have their own regulations that must be adhered to, and violating any of these, even accidentally, can significantly cost businesses.

Fortunately, the IRS is trying to make this process a little easier on firms and their owners through its Voluntary Classification Settlement Program (VCSP). This initiative allows businesses to reclassify their workers as employees for employment tax purposes for future tax periods. By applying to and being approved for the VCSP, companies are able to get partial tax relief from the federal government for each worker who is reclassified as an employee for future tax periods.

Eligibility requirements

There are eligibility requirements that businesses must meet in order to be approved for the VCSP. These include:

  • Forms 1099 filed for each worker over the past three years
  • No current involvement in an employment tax audit by the IRS, and no current involvement in an audit concerning the classification of the workers by the Department of Labor or state government agency
  • Workers consistently treated as independent contractors or other non-employees in the past

Information about the VCSP application process can be found on the IRS website. Once businesses have been approved for the program, they must agree to prospectively treat the class or classes of workers as employees for future tax periods, in exchange for the following:

  • Pay 10 percent of the employment tax liability that would have been due on compensation paid to the workers for the most recent tax year
  • Not be liable for any interest and penalties on the amount, and
  • Not be subject to an employment tax audit with respect to the worker classification of the workers being reclassified under the VCSP for prior years.

While there are many requirements and stipulations that businesses must meet, there are also benefits that companies can take advantage of through programs such as the VCSP. When dealing with payroll issues, firms need to be concerned with ensuring their practices are compliant with applicable laws and regulations, and the many different requirements can seem overwhelming. By applying for the VCSP, companies may be able to significantly ease their tax burdens associated with the prior misclassification of their workers.

When navigating the various forms, requirements and instructions of the VCSP, businesses can work with Paychex to make the process easier. Paychex provides access to all of the information and forms needed to begin the application process.

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.

This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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