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New FAQs on voluntary worker classification settlements

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in Small Business Tax,Small Business Tax Deduction Strategies

The IRS has updated its website on the new Voluntary Classification Settlement Program (VCSP).

Alert: The agency reiterates in the Frequently Asked Questions (FAQs) section that participation in the program will not trigger an audit.  

Here’s the whole story: Under a new initiative announced in 2011 (IR-2011-95), employers can resolve payroll tax questions by voluntarily reclassifying the employment status of workers. Employers must agree to prospectively treat affected workers as employees. To qualify, an employer:

  • Must have consistently treated the workers in the past as nonemployees
  • Must have filed all required Forms 1099 for the workers for the previous three years
  • Cannot be under audit currently by the IRS, the Department of Labor or any state agency concerning the classification of these workers.

Filing requirements

An employer applies for VCSP by filing Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before it begins treating workers as employees. When an employer is accepted into the program, it agrees to pay slightly more than 1% of the wages paid to reclassified workers for the prior year.

There is no interest or penalties. For the first three years, participating employers are subject to a six-year statute of limitations instead of the usual three-year period for payroll taxes.

The revised FAQs clarify these three points:

1. An employer must have filed all required Forms 1099 for the previous three years to participate in the VCSP. An employer will still be able to participate if the forms were filed late. However, employers that did not file the forms, or those that filed Forms 1099 more than six months after their due dates, are ineligible.

2. An employer that is a member of a consolidated group can’t participate in the VCSP if another member of the consolidated group is under IRS audit. Rejection of an employer’s application won’t automatically trigger an audit.

3. The VCSP only concerns future years. The IRS isn’t making any determination with regard to prior years.

Tip: The VCSP is more lenient than the IRS’ Classification Settlement Program (CSP).

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