It’s a fairly common scenario:
For years, you’ve been classifying some or all of your workers as independent contractors rather than employees, and there haven’t been any issues or problems.
That is, until now.
Why? Because you’ve been doing some research, and discovered there’s a possibility that if your business is flagged for an audit, the IRS may not agree with your classification.
And if that happens, you’ll be on the hook for significant financial penalties (which could lead to debt), and could wind up facing a costly, prolonged audit.
The Voluntary Classification Settlement Program (VCSP)
Rather than lie awake in bed at night worrying about what might happen, there’s a settlement alternative that you may want to explore.
It’s called the IRS’s Voluntary Classification Settlement Program, or VCSP for short. It allows you to reclassify your workers as employees rather than independent contractors for employment tax purposes going forward.
You may also get some partial relief for federal employment taxes owing.
Eligibility to Participate
To participate in the VCSP, you must meet the following requirements:
#1 You must have consistently treated the workers you wish to reclassify as independent contractors.
#2 You must have filed all required Forms 1099 for the workers to be reclassified for the last three years.
#3 You cannot be currently under employment tax audit by the IRS (having your income tax under audit will not disqualify you from participating).
#4 You cannot be currently under audit by the Department of Labor or by a state government agency regarding the classification of your workers.
#5 If you have been previously audited regarding the classification of your workers, you must have complied with all results of the audit, and are not currently contesting any the classification in court.
Penalties Upon Acceptance
If your application to participate in the VCSP is approved, then you agree and will be expected to treat the class or classes of affected workers as employees (and not independent contractors) for all future tax periods.
Furthermore, you also agree to pay 10 percent of the employment tax liability that would have been owed to the IRS for the most recent tax year, as determined under the reduced rates of section 3509(a) of the Internal Revenue Code.
In exchange for these commitments, you will not be liable for any interest or penalties on the amount owing, and you will not be subject to an employment tax audit concerning the reclassified workers.
Jeffrey B. Kahn, the principal tax attorney of the Law Offices of Jeffrey B. Kahn, P.C., has an excellent blog that provides useful information on the VCSP, as well as other tax and IRS-related issues that matter to business owners.
Jeffrey is also the host of the financial and tax radio show “Insight Advantage,” which broadcasts live each Friday and can be downloaded from the practice’s website. Visit www.kahntaxlaw.com for more information.