Earlier today, the IRS announced a new “Voluntary Classification Settlement Program” (VCSP), which will extend a break to businesses that come forward to admit improperly classifying workers as independent contractors to evade federal payroll taxes.
As we reported earlier this morning in our story “Labor Department Cracks Down on Businesses for Wage Violations” misclassifying workers as independent contractors is a tactic used by many businesses to avoid paying various taxes, including unemployment insurance taxes, premiums for workers’ compensation and the employer’s portion of Medicare and Social Security taxes. In the process, they cheat workers by leaving them with fewer rights such as overtime protections. See the Wage and Hour Violation section of our website for more information on how these practices hurt Washington workers.
According to IRS Commissioner Doug Shulman, the agency’s new settlement program, which is part of its broader “Fresh Start” initiative, “provides certainty and relief to employers in an important area,” and is “part of a wider effort to help taxpayers and businesses to help give them a fresh start with their tax obligations.”
The IRS Press Release from September 21 described the logic behind the program as follows:
The new Voluntary Classification Settlement Program (VCSP) is designed to increase tax compliance and reduce burden for employers by providing greater certainty for employers, workers and the government. Under the program, eligible employers can obtain substantial relief from federal payroll taxes they may have owed for the past, if they prospectively treat workers as employees. The VCSP is available to many businesses, tax-exempt organizations and government entities that currently erroneously treat their workers or a class or group of workers as nonemployees or independent contractors, and now want to correctly treat these workers as employees.
To be eligible, an applicant must:
- Consistently have treated the workers in the past as nonemployees,
- Have filed all required Forms 1099 for the workers for the previous three years
- Not currently be under audit by the IRS, the Department of Labor or a state agency concerning the classification of these workers
Interested employers can apply for the program by filing Form 8952 Application for Voluntary Classification Settlement Program, at least 60 days before they want to begin treating the workers as employees.
Businesses should be aware that the Fresh Start program only covers federal taxes; depending on circumstances, employers may still be liable for unpaid state taxes, fines and penalties.
In a statement obtained by the Seattle Times, IRS Commissioner Doug Shulman said the agency is trying to encourage “the right behavior so that people pay their taxes this year, five years from now and 20 years from now. We want to make it as easy as possible for people to come in and get right going forward.”
At the moment, the IRS has not established a deadline for applications to the Voluntary Classification Settlement Program. Employers who are in violation of wage and hour laws should be aware that if they fail to come forward and are caught improperly classifying employees as independent contractors, they may be liable for the equivalent of three years’ employment taxes with interest and added penalties.
In a recent article for AccountingWEB, Alan Portnoy commented on the merits of VWSP: “I think the program is a great idea. Other tax relief and ‘amnesty’ programs at federal and state levels have let taxpayers comply and pay significantly less than the amount of back taxes due. Let’s hope employers who have not classified workers as employees take full advantage of this program. If for no other reason, likely tax hikes starting in 2013 will leave less money to catch up on back taxes.”