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Voluntary Classification Settlement Program: What it is and How it Can Effect You

Payroll
Article
10/29/2013

The Internal Revenue Service’s Voluntary Classification Settlement Program (VCSP) offers employers partial relief from past federal employment tax obligations.

The IRS program allows employers who qualify to reclassify their workers, or a class of workers, from independent contractors or non-employees to employees for tax purposes.  

In exchange for employers reclassifying non-employees and independent contractors, the IRS will reduce employment taxes owed — without interest or any fees.

While the program is open to just about any taxpaying employer, there are certain eligibility requirements one must follow. For instance, the IRS wants to make sure that no employer in the program is currently under tax audit for the classification of its employees.

Understanding the program may be confusing, and multiple changes have occurred since its inception. Read on to discover a list of program benefits and instructions on how to apply.

Benefits for Employers

According to the IRS, there are many benefits that a taxpaying employer receives in exchange for treating a class or classes of workers as employees. These benefits include:

  1. Employers pay only 10 percent of the employment tax liability that they owe on workers from the previous tax year.
  2. There are no interest charges or penalties.
  3. An employer’s previous tax years are not subject to an audit under the VCSP.

The VCSP was formed to discourage employment tax fraud. Independent contractors are excluded from many employment taxes and are classified as such to avoid these taxes.

Who is Eligible?

Not all employers are eligible to participate in the VCSP. It is only for those employers who want to voluntarily change the classification of their workers from independent contractors or non-employees to employees for partial tax relief. Some of the eligibility requirements include:

  1. The employer must be a taxpayer who has treated workers as independent contractors or non-employees.
  2. No current employment tax audits or audits on classification of workers may be in process.
  3. If previously audited by the IRS, the taxpayer must be in complete compliance with the results of that audit.

Apply for VCSP

Interested employers can still apply for the program. Remember that the waiving of Forms 1099 has expired before submitting an application.

How to apply:

  1. Use Form 8952, Application for Voluntary Classification Settlement Program.
  2. Employers should file the application at least 60 days prior to the date they want to begin treating workers as employees.
  3. The applicant may provide contact information for someone who has a valid Power of Attorney to complete the process, but the applicant must sign Form 8952.
  4. If accepted into the program, VCSP will enter into a closing agreement.

Learn more about the latest updates of the Voluntary Classification Settlement Program here.

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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