Consistent past treatment
Consistently treated workers as independent contractors or non-employees in the past.
Federal Tax Matters
Voluntary Classification Settlement Program
The IRS Voluntary Classification Settlement Program (VCSP) provides a unique opportunity for eligible employers to reclassify their workers as employees for employment tax purposes, offering a streamlined path to compliance with federal tax laws while minimizing the risk of penalties and enforcement actions.
The basics
What is the VCSP?
The VCSP is a voluntary program administered by the IRS that allows qualifying employers to proactively reclassify their workers as employees for federal employment tax purposes. By participating in the VCSP, employers can address potential worker classification issues head-on, reducing their exposure to penalties and other consequences associated with misclassification.
Who qualifies
Eligibility criteria
To qualify for the VCSP, employers must meet certain eligibility criteria set forth by the IRS, including:
Forms 1099 filed
Filed all required Forms 1099 for the workers to be reclassified for the previous three years.
Not under audit
Not currently under audit by the IRS, Department of Labor, or a state agency concerning the classification of the workers.
Applying to the program
How to apply for the VCSP
Employers who meet these criteria may voluntarily apply for the VCSP to reclassify their workers and achieve compliance with federal employment tax laws. To participate, an employer must submit Form 8952, Application for Voluntary Classification Settlement Program, at least 120 days before the desired reclassification effective date.
Consequences of misclassification
Misclassifying an employee as an independent contractor without a reasonable basis can result in significant liabilities for the employer, including taxes, penalties, and even potential criminal charges. An employer who misclassified a worker may be liable for unfiled employment tax forms, a portion of the employee’s unpaid income tax and Federal Insurance Contributions Act (FICA) contributions, the employer’s share of FICA, and Annual Federal Unemployment Tax (FUTA) taxes. In cases of suspected intentional misconduct or fraud, employers may face additional fines, penalties, and even imprisonment for up to one year.
Why participate
Benefits of participation in the VCSP
Participating in the VCSP offers numerous benefits for eligible employers, such as:
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Reduced tax liability
Employers accepted into the VCSP pay only 10% of the employment tax liability that would have been due on compensation paid to the reclassified workers for the most recent tax year.
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Relief from certain penalties and interest
Employers accepted into the VCSP are not subject to penalties and interest on the reduced tax liability.
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Prospective compliance
By voluntarily reclassifying workers as employees, employers can achieve compliance with federal employment tax laws moving forward and avoid employment tax audits related to the reclassified workers’ prior classification.
By the numbers
What the VCSP means for you
10% of the employment tax liability due on the reclassified workers’ most recent tax year
120days minimum lead time to file Form 8952 before the desired reclassification date
3years of required Forms 1099 filed for the workers you intend to reclassify
Accepted employers are not subject to penalties or interest on the reduced liability and avoid employment tax audits tied to the reclassified workers’ prior classification.
Next steps
Navigate the VCSP with confidence
Successfully navigating the VCSP process requires careful consideration of eligibility criteria, completion of required forms and documentation, and strict adherence to IRS guidelines. Our experienced tax attorneys and CPAs assess your eligibility, assist with Form 8952, and help resolve related worker misclassification and FICA tax exposure. Schedule a complimentary 30-minute consultation to explore how the VCSP can help your business achieve compliance with employment tax laws while minimizing potential liabilities.