The Voluntary Classification Settlement Program (VCSP) is an initiative that allows qualified businesses to reclassify certain workers from independent contractors or non-employees to employees for employment tax purposes. By applying to and being approved for this voluntary program, companies can get partial tax relief from the federal government for future tax periods for each worker who is reclassified as an employee. Even better, the IRS will reduce participating employers' owed employment taxes without interest or any fees.
How does the VCSP work?
This IRS instituted the classification settlement program to help employers manage the burden of employment tax reporting and to discourage employment fraud related to misclassification of independent contractors to avoid paying employment taxes. While the program is open to just about any taxpaying employer, there are certain eligibility requirements. 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. 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.
The benefits of using the Voluntary Classification Settlement Program
When dealing with payroll services, firms need to ensure that their practices are compliant with applicable laws and regulations, and the many different requirements can seem overwhelming. By applying for the IRS' voluntary worker classification settlement program, companies may be able to significantly ease the tax burdens associated with the prior misclassification of their workers. Acceptance into the program means:
- Employers pay only 10 percent of the employment tax liability that they owe on workers from the previous tax year.
- There are no interest charges or penalties.
- An employer's previous tax years are not subject to an audit under the VCSP.
Who is eligible for the Voluntary Classification Settlement Program?
As you may expect, not every business automatically qualifies for this IRS classification settlement program. To be eligible to participate and gain IRS approval, businesses must meet the following conditions:
- Forms 1099 filed for each worker over the past three years.
- No current involvement in an employment tax audit by the IRS, and no 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.
- 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.
- Not be subject to an employment tax audit with respect to the worker classification of the workers being reclassified under the Voluntary Classification Settlement Program for prior years.
How to apply to the Voluntary Classification Settlement Program
Interested employers who believe they meet the eligibility requirements can apply for the program by following the steps listed below:
- Use Form 8952, Application for Voluntary Classification Settlement Program.
- Employers should file the application at least 60 days prior to the date they want to begin treating workers as employees.
- 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.
- If accepted into the program, the VCSP will enter into a closing agreement.
When managing employees, some of the most important areas of consideration are payroll, maintaining control over wages, taxes, and other financial elements. Business owners can easily be overwhelmed when facing the tough task of remaining compliant with applicable laws and regulations; errors sometimes occur. Nevertheless, through the VCSP, employers can ease tax burdens stemming from misclassification of employees.
Employers are encouraged to seek professional guidance when participating. The Voluntary Classification Settlement Program is only offered by the IRS, and understanding the agency's guidelines may be confusing. Multiple changes have occurred since its inception. If you’re unsure about the necessary requirements, consider working with an HR expert to enable a straightforward application process.