IRS Offering Employers Break on Misclassification

Employers worried that they may have misclassified independent contractors may find relief in a new program from the IRS.

The Voluntary Classification Settlement Program (VCSP) was announced September 21 and offers employers the opportunity to get into compliance by making a minimal payment covering past payroll tax obligations rather than waiting for an IRS audit.

“This settlement program provides certainty and relief to employers in an important area,” said IRS Commissioner Doug Shulman. “This is part of a wider effort to help taxpayers and businesses to help give them a fresh start with their tax obligations.”

The VCSP is designed to increase tax compliance and reduce burdens for employers by providing greater certainty for employers, workers, and the government, according to a statement from the IRS. To be eligible, an applicant must:

  • consistently have treated the workers in the past as nonemployees;
  • have filed all required Forms 1099 for the workers for the previous three years; and
  • not currently be under audit by the IRS, the U.S. Department of Labor (DOL), or a state agency concerning the classification of these workers.

Employers accepted into the program will pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers for the past year. No interest or penalties will be due, and the employers won’t be audited on payroll taxes related to the workers for prior years.

Interested employers can apply for the program by filing Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before they want to begin treating the workers as employees.

The VCSP announcement follows a statement from the DOL and the IRS on September 19 about the signing of a memorandum of understanding aimed at improving departmental efforts to fighting misclassification. The agreement enables the DOL and IRS to share information and coordinate law enforcement related to employee classification.

“This agreement takes the partnership between the IRS and Department of Labor to a new level,” Shulman said. “In this new phase of our relationship, we will work together more efficiently to address worker misclassification issues and better serve the needs of small businesses and employees.”

In addition to the DOL-IRS agreement, labor commissioners and other agency leaders representing seven states also signed memorandums of understanding to share information and coordinate law enforcement with the DOL and IRS. The signatory states are Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah, and Washington. Labor Secretary Hilda L. Solis also announced agreements for the Wage and Hour Division to enter into agreements with the state labor agencies of Hawaii, Illinois, and Montana as well as with New York’s attorney general.

The memorandums of understanding arose as part of the DOL’s Misclassification Initiative.

Learn more about employee classification with the Wage and Hour Compliance Manual