IRS Settlement Program – Independent Contractors vs. Employees


Employers who determine that they are misclassifying workers as independent contractors should take advantage of a new IRS Voluntary Classification Settlement Program (the “VCSP”).

The Basics

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:

  1. must have consistently treated the workers as nonemployees;
  2. must agree to treat all workers in the same class as employees;
  3. must have filed all required Forms 1099 for the workers for the previous three years;
  4. cannot currently be under audit by the IRS; and
  5. 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.


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