Under the IRS’ Voluntary Classification Settlement Program (VCSP), you can voluntarily reclassify independent contractors as employees for future tax periods on favorable tax terms: you’ll be liable for just over 10% of the wages paid to those reclassified workers for the past year and no penalties or interest will be due. Recently updated FAQs shed more light on this program.
VCSP food for thought. Previously, the IRS clarified that employers that are undergoing payroll tax audits are ineligible to participate in the VCSP. The FAQs further refine this restriction by noting that you will be considered to be under a payroll tax audit if you’re contesting the results of the audit with the IRS’ Appeals office.
The FAQs again address employers’ concerns regarding participation in the VCSP by pointing out that by signing a VCSP closing agreement, you aren’t admitting liability for misclassifying your workers for past tax periods. Participation in the VCSP concerns future tax periods.
Caution: The FAQs note that the IRS also isn’t making any determination regarding the proper classification of those workers for those past tax periods, which means it reserves the right to audit those periods. Similarly, the IRS notes that participation in the VCSP isn’t an automatic trigger for audits for future tax periods, but warns that audits may be triggered for a variety of other reasons.
Rejections won’t bite. You apply to participate in the VCSP by filing Form 8952. The FAQs explain that the IRS will contact you if it rejects your application. Further, according to the IRS, you may reapply and, even if you don’t, you won’t automatically become audit bait because of the rejection. Watch out: The IRS again emphasized that you may be audited for another reason.