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IRS expands settlement program allowing sharp reductions in back payroll taxes due for employers that voluntarily reclassify independent contractors as employees

The IRS on Wednesday, February 27 announced an expansion to the agency’s Voluntary Classification Settlement Program (VCSP), which provides partial relief from federal payroll taxes for eligible employers who are treating their workers (or a particular class or group of workers) as independent contractors or other nonemployees and now want to treat them as employees.

The VCSP allows employers that have erroneously classified workers as independent contractors to voluntarily pay significantly reduced payroll taxes, obtaining substantial relief and avoiding interest or penalties. An employer that participates in the program must agree to reclassify the workers as employees and treat them as such going forward. Nearly 1,000 employers have applied for the VCSP since the program was launched in September 2011.

The expansion to the VCSP program announced this week paves the way for more employers, especially larger employers, to take advantage of the “low-cost option for achieving certainty under the law,” according to the agency. Under the revamped program, employers under IRS audit, other than an employment tax audit, can now qualify for the VCSP.

Furthermore, employers accepted into the program will no longer be subject to a special six-year statute of limitations, rather than the usual three years that normally applies to payroll taxes. These and other permanent modifications to the program are described in Announcement 2012-45 and in questions and answers posted on IRS.gov.

To be eligible for the VCSP, an employer must currently be treating the workers as nonemployees; consistently have treated the workers in the past as nonemployees, including having filed any required Forms 1099; and not currently be under audit on payroll tax issues by the IRS. In addition, the employer cannot currently be under audit by the DOL or a state agency concerning the classification of these workers or contesting the classification of the workers in court. Interested employers can apply for the program by filing Form 8952 at least 60 days before they want to begin treating the workers as employees.

Employers accepted into the program will generally pay an amount effectively equaling just over 1 percent of the wages paid to the reclassified workers for the past year. No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years. Employers applying for the temporary relief program available for those who failed to file Forms 1099 will pay a slightly higher amount, plus some penalties, and will need to file any unfiled Forms 1099 for the workers they are seeking to reclassify.