Have you misclassified an employee as an independent contractor? Relief under Voluntary Classification Settlement Program (VCSP) may be available to you. There are generally 7 factors that are considered by the IRS in determining whether an individual is a common law employee or an independent contractor they are as follows:
- The degree of control exercised by the principal;
- Which party invests in work facilities used by the individual;
- The opportunity of the individual to realize a profit or loss;
- Whether the principal can discharge the individual;
- Whether the work is part of the principal’s regular business;
- The permanency of the relationship; and
- The relationship the parties believed they were creating.
Because both employers and employees are subject to employment taxes under FICA (social security taxes), and employers are also subject to unemployment taxes under FUTA, employers may try to classify an employee as an independent contractor to save payroll taxes. Because the IRS is aggressively seeking out misclassifications, they have put in place a Voluntary Classification Settlement Program (VCSP). The program carries generous settlement terms and provides audit relief for previous years.
Think we misclassified workers, am I eligible for the VCSP?
The VCSP is available for taxpayers who want to voluntarily change the prospective classification of their workers. The program applies to taxpayers who are currently treating their workers (or a class or group of workers) as independent contractors or other nonemployees and want to prospectively treat the workers as employees.
The taxpayer must have consistently treated the workers and independent contractors or other nonemployees, and must have filed all required Form 1099 for the workers to be reclassified under the VCSP for the previous three years to participate. However, up to June 30, 2013 if you have not filed the 1099s, there may be additional relief available, but at an additional cost. In addition, the taxpayer cannot currently be under employment tax audit by the IRS, or by the Department of Labor or by a state government agency.
What will it cost me and what will I gain participating in the VCSP?
The taxpayer will pay 10% of the employment tax liability that would have been due on compensation paid to the workers for the most recent tax year, determined under the reduced rates of section 3509(a) of the Internal Revenue Code.
The taxpayer will gain the assurance that they 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, and not be liable for any interest and penalties on the amount.
For taxpayers who did not properly file Form 1099 and which to participate in the VCSP, the cost is to pay 25% of the employment tax liability that would have been due on compensation paid to the workers for the most recent tax year, determined under the reduced rates of section 3509(a) of the Internal Revenue Code. In this case, the taxpayer will still not be liable for any interest or penalties on the liability and will not be subject to an employment tax audit with respect to the worker classification of the workers being reclassified and will be granted a reduced, graduated penalty for unfiled Forms 1099.
I believe I have misclassified workers and am eligible to apply for VCSP, now what?
We recommend giving us a call and discussing your situation and determining if you should apply for VCSP. The application for VCSP is done using IRS Form 9852, Application for Voluntary Classification Settlement Program. The application should be filed at least 60 days prior to the date the taxpayer wants to begin treating a worker as an employee.
I don’t know if I have an issue, what do I do?
Please contact us and we will gladly assist you in understanding your situation and your options.
Disclaimer: All content provided in this article is for informational purposes only, and is subject to change. Contact a DS+B professional before using or acting on any information provided in this article