What is an independent contractor? This question has big implications for payroll tax purposes. Recently the IRS rolled out a new program to help employers resolve past misclassifications. With the new IRS Voluntary Classification Settlement Program (VCSP), you have an opportunity to resolve past misclassifications, restore your current tax compliance, and reduce the burden of misclassification down the road. When you classify employees and independent contractors, you need to be in compliance with tax law. The VCSP is definitely something you don’t want to miss out on; you can keep the IRS at bay and your organization in compliance.

In a BLR webinar titled “Independent Contractor or Employee? How to Use the IRS’ New Relief Program,” Vicki M. Lambert, CPP, advised how employers can utilize the VCSP to resolve any independent contractor/employee misclassifications.

How Does the Voluntary Classification Settlement Program Help Employers Reclassify Independent Contractors Correctly?

The VCSP was designed to increase tax compliance and reduce burden for employers by providing greater certainty for employers, workers and the government. It permits taxpayers to voluntarily reclassify workers as employees for federal employment tax purposes (for workers previously incorrectly classified as independent contractors). The program is optional, and it applies to future tax periods with limited federal unemployment tax liability for past non-employee treatment.

In the webinar, Lambert noted that “in order to get employers to comply with taxes if they've been in a non-compliance situation, you kind of have to give them some incentive. ” This program provides that incentive. It will be used to facilitate voluntary resolution of worker classification issues, which is—according to the IRS—beneficial because it provides taxpayers with a program that allows for voluntary reclassification of workers outside of an examination context. It eliminates the need to go through normal administrative correction procedures applicable to employment taxes.

It also allows employers the opportunity to get into the compliance by making a minimal payment covering past payroll tax obligations rather than waiting for an IRS audit and higher penalties.

What must an employer do in order to participate in the VCSP? What can't they do? See our related article where Lambert explains employer requirements for participation in the VCSP.

Effect of VCSP for Employers

Employers accepted into the program pay an amount equaling just over 1 percent of the wages paid to the reclassified workers for the past year. In trade, no interest or penalties will be due and the employers will not be audited on payroll taxes related to these workers for prior years. However, participating employers will, for the first three years under the program, be subject to a special six-year statute of limitations rather than the usual three years that generally applies to payroll tax.

To participate, the employer will enter into a closing agreement with the IRS to finalize the terms of the VCSP. Payment will be made with the closing agreement. At that time, the employer agrees to treat the class or classes of workers as employees instead of independent contractors or other non-employee classifications for future tax periods for employment tax purposes. The closing agreement will be similar to the one used for the Classification Settlement Program (CSP).

For more information on classifying independent contractors correctly, order the webinar recording. To register for a future webinar, visit http://catalog.blr.com/audio.

Vicki M. Lambert is a Certified Payroll Professional with more than 30 years of multi-state payroll experience. She is founder and director of The Payroll Advisor, a firm that provides unique and expert services for business owners and other professionals dealing with the complexities and technicalities of the payroll process.