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Employee & Independent Contractor Misclassification Update: IRS New Voluntary Classification Settlement Program Offers Businesses Amnesty

Thumbnail image for Thumbnail image for Thumbnail image for Thumbnail image for Thumbnail image for Thumbnail image for Thumbnail image for Thumbnail image for Thumbnail image for Thumbnail image for top.lawyers.arrive.mag.2011.jpgThe IRS just announced its Voluntary Classification Settlement Program (“VCSP”) which will allow employers to reclassify their workers for federal tax purposes and only face a reduced penalty along with audit protection. This new tax relief program offers a great tax incentive for companies who want to reclassify their independent contractors as employees. Our law firm has represented many companies accused of misclassifying its workers and believes that this new IRS program could benefit many companies who face a misclassification investigation.

Many companies engage in misclassification of workers as independent contractors to avoid paying payroll taxes as well as workers’ compensation. If audited by the IRS or the Department of Labor (“DOL”), these businesses not only face back taxes, but penalties and interest which can be economically devastating.

This program is open to you if you are a taxpaying employer and you employ independent contractors or other workers and want to begin classifying them as employees. In order to begin classify your workers as employees, you must meet the following conditions:

1) You must have filed all the required 1099 forms for the workers for the preceding 3 calendar years ending before the date you file Form 8952; and 2) You cannot currently be under audit by the IRS or by the Department of Labor for misclassification of these workers.

By voluntarily agreeing to prospectively classify your workers as employees, you would benefit from the following:

1) Pay only 10 percent of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year, as determined under the IRS’ reduced rates;
2) Not be liable for any interest and penalties on the amount; and 3) Not be subject to an employment tax audit with respect to worker classification of the workers that are being reclassified pursuant to the VCSP for prior years.

The VCSP is a great incentive to employers who are misclassifying their workers as independent contractors to reclassify them as employees. Not only does the program offer a great economic incentive but helps you to avoid any potential future lawsuits or liabilities you may incur for misclassification in the event you are sued or investigated by the DOL. For example, if you paid $1,000,000 to workers that fall under the VCSP in 2010, and then you submit an application for the VCSP to begin treating your workers as employees beginning 01/01/12, the IRS would determine your tax liability for the year ended 2010. If the resulting employment taxes are on the $1,000,000 are $106,800, then under the VCSP, you would only pay 10% or $10,680 in taxes.

Although this is a great program, evaluate your workers and make sure that your workers really should be classified as employees before you enter into this program. Once you go to the IRS, you might end up paying unnecessary payroll taxes. Consult with an attorney to examine which of your workers should be treated as employees before you enter into the VCSP.

In order to apply for the VCSP, you must fill out Form 8952 at least 60 days from the date that you want to begin treating your workers as employees. With your application, be sure to provided a contact or a representative for Power of Attorney. Our Misclassification Attorneys at Villanueva & Sanchala are already in the process of helping many companies with this program. Call us at (800) 893-9645 to discuss how your company might benefit from entering this program.


Thank you for visiting our Blog. This blog provides general information and thoughts about various employment law issues primarily in the New York Tri-State area and occasionally in other areas. You are welcome to read the posts. However, do not construe any content on this blog as legal advice or the creation of an attorney-client relationship. Again, we provide the content only for informational purposes. You should not make decisions based information on our blog since the application of the law depends on the facts and each situation may be different. In addition, the law in most jurisdictions is different and changes constantly and we make no representations that any information on our blog has been updated. The Blog should not be used as a substitute for competent legal advice from an experienced employment law attorney in your state or jurisdiction.

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