Employers who determine that they are misclassifying workers as independent contractors should take advantage of a new IRS Voluntary Classification Settlement Program (the “VCSP”).
In essence, VCSP prospectively treats workers as employees instead of independent contractors at a cost of approximately 1% of the compensation paid to the workers reclassified during the most recent tax year.
Example: Company paid $100,000 to four independent contractors during tax year 2011. If the Company applies for VCSP, it pays a penalty of about $1,000 and agrees to classify the workers as employees from tax year 2012 forward.
To participate in VCSP, the company:
- must have consistently treated the workers as nonemployees;
- must agree to treat all workers in the same class as employees;
- must have filed all required Forms 1099 for the workers for the previous three years;
- cannot currently be under audit by the IRS; and
- cannot be currently under audit concerning the classification of the workers by the Department of Labor or by a state government agency.
Evidently, there is no deadline for participation.
Companies with questionable worker classifications should strongly consider VCSP as a cost-effective way to avoid potentially huge taxes and penalties.