On December 17, the IRS released Announcement 2012-45 and Announcement 2012-46, providing additional information on the Voluntary Classification Settlement Program (VCSP). Information had previously been provided in Announcement 2011-64. The VCSP is a new program developed by the IRS that allows taxpayers to voluntarily reclassify their workers as employees for future tax periods for employment tax purposes.
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. Exempt organizations and government entities may participate in VCSP if they meet all of the eligibility requirements:
- A taxpayer must have consistently treated the workers as independent contractors or other nonemployees, and must have filed all required Forms 1099 for the workers to be reclassified under the VCSP for the previous three years to participate. However, there is a temporary expansion for eligibility which is discussed here
- The taxpayer cannot currently be under employment tax audit by the IRS and the taxpayer cannot be currently under audit concerning the classification of the workers by the Department of Labor or by a state government agency.
- If the IRS or the Department of Labor has previously audited a taxpayer concerning the classification of the workers, the taxpayer will be eligible only if the taxpayer has complied with the results of that audit and is not currently contesting the classification in court.
Under the VCSP, a taxpayer will pay 10 percent of the amount of employment taxes calculated under the reduced rates of section 3509(a) of the Internal Revenue Code for the compensation paid for the most recent tax year to the workers being reclassified under the VCSP. In addition, the taxpayer will not be liable for any interest and penalties on the payment under the VCSP, and will not be audited for employment tax purposes for prior years with respect to the worker classification of the workers. Taxpayers may apply for the VCSP using Form 8952, Application for Voluntary Classification Settlement Program.
The IRS has developed a set of FAQs explaining eligibility for and consequences of entering into the VCSP.
