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What is the IRS Program for Payroll Tax Relief (VCSP)?

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Question: What is the IRS Program for Payroll Tax Relief (VCSP)?

The IRS has announced a new program to encourage businesses to voluntarily re-classify workers as employees. The program, called the Voluntary Classification Settlement Program (VCSP) provides "relief" for companies who meet certain criteria and who voluntarily re-classify workers as employees.

While the program sounds good, it may bring up other legal and regulatory issues (discussed below), so be sure to talk to your legal advisor before enrolling in the VCSP program.

Answer:

The IRS has announced a new program to encourage businesses to voluntarily re-classify workers as employees. The program, called the Voluntary Classification Settlement Program (VCSP) provides "relief" for companies who meet certain criteria and who voluntarily re-classify workers as employees.

Why should I apply for this payroll tax relief program?
Many employers have mis-classified workers, paying them as independent contractors when they are in fact employees, as defined by the IRS. Most companies are mis-classifying these workers unintentionally, but some are intentionally paying workers as independent contractors to avoid paying FICA taxes, unemployment tax, and other employee benefits.

If the business is audited, or if a worker files a complaint, and the IRS or state employment agency investigates, there are serious tax consequences for the employer. If, for example, an employer has been paying a worker as an independent contractor for 10 years, and the worker should have been classified as an employee, the company must pay payroll taxes for those 10 years, plus fines and penalties. As you can see, mis-classification can be costly, if it is found in an audit. The IRS providing this relief program so employers can correct the error without having to pay the retroactive costs.

What are the benefits of this voluntary payroll tax relief program?
If you decide to participate in this program, and you voluntarily re-classify workers as employees, here's what will happen:

  • You must pay an amount "effectively equaling just over one percent of the wages paid to the reclassified workers for the past year." While this may sound like a lot of money, consider the cost of having to pay many years worth of payroll taxes.
  • No interest or penalties will be due on back unpaid payroll taxes
  • You will not be audited on payroll taxes related to these workers for past years
  • You 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 taxes."

What are the Qualifications for the Program?
To qualify for the payroll tax relief under this program, the IRS requires the company meet the following criteria:

  • The company must consistently have treated the workers in the past as non=employees. That is, you must have always paid this person as an independent contractor or other non-employee, not paid employee benefits such as sick pay or vacations, or otherwise given to this worker any rights or benefits you gave employees.
  • The company must have filed all required Forms 1099 for the workers for the previous three years, If you at any time gave this worker a W-2 form as an annual wage statement, you can't use this relief program. and
  • The company may not currently be under audit by the IRS, the Department of Labor or a state agency concerning the classification of these workers.

How does the program work?

  • First, apply for the relief described by the IRS. Use IRS Form 8952 to apply. The form requests you to calculate the amount of payment based on worker compensation for the past year. Read the instructions to Form 8952 to find out how to complete this form.
  • The IRS will review the application and let you know if your business is accepted into the program. You will be asked to sign a closing agreement and pay the amount due (as calculated in Form 8952) at the time of the closing.
  • Then, after 60 days, you may begin treating workers as employees. The IRS says, "The application should be filed at least 60 days from the date the taxpayer wants to begin treating its workers as employees.">

What if I'm not sure if my workers are employees?
If you have independent contractors working for you, you may be wondering if those workers should be classified as employees. You can use IRS Form SS-8 to request a review of worker status by the IRS.

What other legal issues might result from this re-classification? This program is presented by the Internal Revenue Service and it has no relationship to state employment agencies. It is unclear at this point whether re-classification of workers from independent contractors to employees might trigger an audit by a state employment agency.

Re-classifying workers as employees might also trigger concerns about past payroll taxes and benefits not credited to workers while they were independent contractors. For example, FICA taxes are not credited to independent contractors, so if these individuals did not pay self-employment taxes, they may not be eligible for Social Security/Medicare credit for the time they were not employees.

Disclaimer: The information in this article and on this GuideSite is for general information purposes, and is not intended to be tax or legal advice. Details about this program may change without notice and specific situations may vary. Be sure to consult with your tax or legal advisor before taking action on this issue.

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