A common employment mistake taxpayer's frequently make is the misclassification of their independent contractors. Due to complexity of the classification criteria, employees are often erroneously classified as independent contractors. The misclassification can have business tax consequences and may result in an audit and possible penalties.
The Internal Revenue Service (IRS) has recognized that in most instances misclassifications are unintentional. For this reason, the IRS recently employed a new program to grant employers the opportunity to rectify any possible misclassifications prior to an audit. The Voluntary Worker Classification Settlement Program - or VCSP - enables a business to reclassify employees. The business is then liable to pay 10% of the employment tax for the prior year, but is not subject to penalties or interest.
Things to Know Before Entering the VCSP
To ensure eligibility, employers must analyze their current situation and review tax laws affecting businesses before utilizing the VCSP. Eligible businesses cannot already be subject to a worker classification audit and must have:
- incorrectly classified workers as independent contractors and
- filed 1099 forms with the IRS for these workers in the past three years.
When entering into the VCSP an employer must agree to certain terms, including an extended statute of limitations of employment tax assessments and continued reclassification of affected employees. Additionally, accepting the VCSP does not grant immunity from investigation by other federal agencies. Workers impacted may also stake claims under wage and hour laws.
How to Apply for the VCSP
To apply for the program, interested businesses meeting the criteria necessary for eligibility must file with the IRS a Form 8952, Application for Voluntary Classification Settlement Program. Form 8952 needs to be filed at least 60 days before the commencement of the reclassification of impacted employees.
While the IRS continues its crackdown on the classification of workers, the new VCSP provides an opportunity for businesses to review and make sure worker classifications are correct. If workers have been misclassified, contact an experienced business taxation attorney to discuss whether the VCSP might be an option.
Contact an experienced tax lawyer today if you need a consultation regarding these laws. Contact the Law Offices of Jeffrey S. Freeman today for a free consultation.
