Voluntary Classification Settlement Program in the United States

Introduction to the Voluntary Classification Settlement Program (VCSP)

The Voluntary Classification Settlement Program is a program developed by the IRS that allows taxpayers to voluntarily reclassify their workers as employees for future tax periods for employment tax purposes. Under the Voluntary Classification Settlement Program, a taxpayer will pay 10 percent of the amount of employment taxes that would have been due on compensation paid to the workers being reclassified for the most recent tax year, calculated under the reduced rates of section 3509(a) of the Internal Revenue Code. In addition, the taxpayer will not be liable for any interest and penalties on the payment under the Voluntary Classification Settlement Program, and will not be audited for employment tax purposes for prior years with respect to the worker classification of the workers. Taxpayers may apply for the Voluntary Classification Settlement Program using Form 8952.

Reclassify independent contractors as employees

The IRS unveils its VCSP allowing companies to prospectively reclassify independent contractors as employees with no audit exposure and minimal taxes for the past. To be eligible, companies must:

Have consistently treated the workers as independent contractors;

Have filed all required Forms 1099 for the workers for the previous three years;

Not currently be under an employment tax audit by the IRS;

Not currently be under audit by the Department of Labor or a state government agency concerning worker classification; and

If the taxpayer company is previously audited by the IRS or the Department of Labor concerning the classification of the workers, that company will only be eligible if you complied with the results of that audit.

Companies admitted to this special program will pay only 10% of the employment taxes that would have been due on amounts paid to these workers the previous year. To see how this payment is computed, see VCSP FAQ 15 and Instructions to Form 8952. There are no interest charges or penalties, and the IRS will not audit payroll taxes for prior years.

Results of participating in the Voluntary Classification Settlement Program

A12. A taxpayer who participates in the Voluntary Classification Settlement Program agrees to treat the class or classes of workers as employees for future tax periods for employment tax purposes and will not be subject to an employment tax audit with respect to the worker classification of the class or classes of workers for prior years.

The taxpayer will pay 10 percent of the employment tax liability, calculated at the reduced rates of IRC section 3509(a), that would have been due on compensation paid to the workers being reclassified for the most recent tax year if those workers were classified as employees for that year, with no liability for any interest or penalties.