IRS Offers Tax Relief for Misclassifying Employees as Independent Contractors
A voluntary program provides a relatively soft landing for construction companies and other high-risk employers
To avoid employment taxes, workers compensation and
other obligations, it is not uncommon for companies in construction and other
industries to misclassify as “independent contractors” many workers who
should be treated as employees.
That strategy can backfire – painfully –
when an audit by the IRS, the Department of Labor’s Wage and Hour Division or
other taxing authorities results in an assessment for taxes, penalties and
In an effort to encourage such companies to play by the rules going forward,
in September 2011 the
IRS implemented the Voluntary Classification Settlement Program. The VCSP
provides an opportunity for eligible companies to reclassify their workers as
employees for future tax periods, in exchange for 90% relief from their unpaid
federal employment taxes. The VCSP was updated in 2012, and a
summary of the modifications is available
on the IRS website.
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To be eligible for the VCSP, a company must meet certain
requirements, such as the following:
consistently treated the workers as nonemployees;
filed all required Forms 1099, for the three previous
years, for the workers to be reclassified;
not currently under
employment tax audit by the IRS; and
under audit concerning the classification of the workers by the Department of
Labor or by a state government agency.
If the IRS or Labor Department has previously audited a company concerning the
classification of the workers, the company will be eligible only if it has
complied with the results of that audit.
For agreeing to treat a class of workers as employees for future tax periods,
the company will:
pay 10% of the employment tax liability that may have been due on compensation
paid to the workers for the most recent tax year;
not be liable for any interest and penalties on the unpaid tax liability; and
not be subject to an employment tax audit with respect to the worker
classification of the workers being reclassified under the VCSP for prior years.
How to Apply
To participate in the VCSP, a company must apply using
Form 8952, Application
for Voluntary Classification Settlement Program. The application should be filed
at least 60 days from the date the company wants to begin treating its workers
as employees. The IRS supposedly seeks to make every effort to process Form 8952
with sufficient time to allow for the voluntary reclassification on the
Along with the application, the company should provide the name of a contact or
an authorized representative with a valid Power of Attorney (Form 2848). The IRS
will contact the company or authorized representative to complete the process
after reviewing the application and verifying the company’s eligibility.
Eligible companies accepted into the VCSP will enter into a closing agreement
with the IRS to finalize the terms of the VCSP. Full and complete payment of any
amount due under the closing agreement will be due at that time.
Participating in the VCSP sounds like a good idea, and for many companies it is.
However, before entering into an agreement with the IRS or any government
agency, it is strong suggested that you consult with your tax or legal
advisors to discuss the potential
benefits and risks.