Employee or Contractor? IRS Offers Amnesty


The Voluntary Classification Settlement Program (VCSP) is a voluntary amnesty program created by the IRS that provides an opportunity for taxpayers to reclassify their workers as employees for employment tax purposes for future tax periods, with partial relief from federal employment taxes. To participate, the taxpayer must meet certain eligibility requirements, apply to participate in the VCSP by filing Form 8952, “Application for Voluntary Classification Settlement Program,” and enter into a closing agreement with the IRS.

The misclassification of employees as independent contractors keeps large sums of money out of the federal coffers, because for those employees the employer is not paying payroll taxes, such as contributions to Medicare and Social Security. Only so much of this money can be captured through the piecemeal use of audits, thus prompting creation of the VCSP. Employers who may have been improperly treating employees as independent contractors now can come in from the cold, so to speak.

In general terms, the difference between an employee and an independent contractor is in the level of control exercised by the company. Essentially, the more that the company can control about what a worker is to do and how to do it, the more likely it is that the worker is an employee for all purposes, including taxes. If, at the other end of the spectrum, a worker essentially is on his own as to such matters, he may well be an independent contractor. In that event, a company would have no need to take part in the VCSP.

The VCSP applies to taxpayers who are currently treating their workers (or a class or group of workers) as independent contractors and who want to prospectively treat the workers as employees. A taxpayer must have consistently treated the workers as nonemployees and must have filed all required Forms 1099, reporting taxable earned income, for the workers to be reclassified under the VCSP for the previous three years.

A taxpayer participating in the VCSP must agree to treat the workers as employees for future tax periods. In exchange, the taxpayer will pay only 10% of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year; will not be liable for any interest and penalties on the amount; and will 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.