Is your company considering reclassifying certain workers from now on, but hesitant because it is worried about triggering a federal employment tax audit or having not consistently filed Forms 1099 for those workers in the past?
If you answered “yes,” then the IRS’ Temporary Expanded Voluntary Classification Settlement Program may interest you, but you must file an application by June 20, 2013.
What Is the Temporary VCSP?
The Temporary VCSP is one of a handful of federal employment tax relief options for companies that are concerned about federal employment tax liability for misclassifying workers as independent contractors. The Temporary VCSP is a voluntary program for taxpayers that are not currently under an employment tax audit, which allows taxpayers to voluntarily prospectively reclassify workers who were treated as independent contractors in exchange for partial relief from federal employment taxes (Social Security, Medicare, unemployment and income taxes).
The IRS established the Temporary VCSP in December 2012 and it is available only through June 30, 2013. IRS Announcement 2012-46 describes the program, which is an expansion of the VCSP that the IRS established in September 2011 and revised in December 2012 (Announcement 2012-45). (For more background, see “IRS Worker Classification Audits — Risks and Relief Options,” May newsletter, p. 2 in the print edition, which discusses other federal employment tax relief options, including the Section 530 Safe Harbor, Section 3509 relief and the VCSP, each of which may be available in an employment tax audit if the IRS determines workers have been misclassified.)
How Does the Temporary VCSP Differ from Other Employment Tax Relief Options?
Unlike many of the other federal employment tax relief options, including the VCSP, the Temporary VCSP does not require taxpayers to have filed Forms 1099 for the affected workers.
To participate in the Temporary VCSP, the taxpayer must:
- have consistently treated the workers proposed for reclassification as non-employees;
- meet certain eligibility requirements;
- apply on or before June 30, 2013; and
- enter into a closing agreement with the IRS.
In addition, once a taxpayer is deemed eligible to participate, they must furnish the agreement to the workers and electronically file all required Forms 1099 for the workers being reclassified for the previous three years.
Eligibility
Taxpayers are not eligible to participate in the Temporary VCSP if they are currently under an employment tax audit by the IRS or currently under audit concerning the classification of workers by the U.S. Department of Labor or by a state government agency.
FAQs
The IRS has posted 24 Q&As about the Temporary VCSP and VCSP on the IRS website.
Further Information
Look for a full analysis of the Temporary VCSP by Employer’s Guide to Fringe Benefit Rules Contributing Editor Vicki M. Nielsen, this week.