The Internal Revenue Service (the "IRS") has intensely scrutinized the classification of workers as independent contractors as a high priority compliance initiative. One self help remedy available to taxpayers is the Voluntary Worker Classification Settlement Program ("VCSP"). The purpose of the VCSP is to permit employers who are treating some workers as independent contractors to reclassify those workers prospectively with certain protections for prior years.

Recently, the IRS announced a temporary expansion of the VCSP to taxpayers who were not originally eligible for the program. The expansion of the VCSP provides a terrific opportunity for employers with concerns over tax classification of certain workers to get a fresh start and minimize exposure for treatment of workers in prior years.

Qualification for the VCSP

To be eligible to participate in the original VCSP, the taxpayer must meet four requirements:     

  • The taxpayer must have consistently treated the workers as nonemployees, and must have issued all required Forms 1099 to the workers for the previous three years.   
  • Neither the taxpayer nor certain affiliates can currently be under an employment tax audit by the IRS.
  • The taxpayer cannot be currently under audit concerning the classification of the workers by the Department of Labor or by a state government agency.
  • A taxpayer who was previously audited by the IRS or the Department of Labor concerning the classification of the workers will only be eligible if the taxpayer has complied with the results of that audit.

The temporary expansion modifies the eligibility requirements to permit taxpayers who have not issued all required Forms 1099 for the previous three years to participate in the VCSP.

Effect of the VCSP

A taxpayer accepted into the VCSP agrees to treat the class of workers for all periods after the commencement of the VCSP. The taxpayer will pay 10 percent of the employment tax liability that may have been due on compensation paid to the newly classified workers for the most recent tax year, determined under the reduced rates of section 3509 of the Internal Revenue Code. In addition, under the expanded VCSP, a taxpayer who has not issued Forms 1099 to workers not classified as employees must pay a portion of the penalty for failing to issue those forms.

Importantly, the taxpayer participating in the VCSP will not be liable for any interest and penalties on the tax liability. Also, the taxpayer will not be subject to an employment tax audit with respect to the worker classification of the workers for prior years.

Application Deadline

The deadline to apply for the expanded VCSP is June 30, 2013. After that date, the VCSP in its previous form presumably will still be available. However, employers wishing to minimize their exposure on worker classification issues should act quickly to be assured of the benefits of participating in the program.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.