IRS Launches Worker Misclassfication Amnesty Program

September 21, 2011 | By: TaxCure Staff

IRS worker missclassification programThe Internal Revenue Service (IRS) has launched a program called the Voluntary Classification Settlement Program (VCSP) or amnesty which enables employers to reclassify certain workers from independent contractors to employees going forward without being liable for all federal employment tax liabilities that would be due for misclassifying workers in the past.

In short, employers can get into compliance with tax laws with a small payment to cover past prior payroll tax obligations instead of waiting for the bigger penalties that could come about with an audit.

The advantages for employees to take part in the program are as follows:

  • The employer is only responsible for 10% of the employment tax liability for the most recent tax year (determined by reduced rates of Section 3509 of the IRS code)
  • Employer avoids interest and penalties on this particular tax liability
  • Employer avoids employment tax audits for worker classification for past years

The differences between an independent contractor and an employee are hazy. Generally, a worker is a contractor if they work their own hours, use their own equipment or tools, are temporary (meaning they don’t work year-round) and send you invoices for hours or jobs completed. There are other differences as well.

Eligibility requirements include :

  • Consistent misclassification of workers in the past.
  • Filed appropriate 1099 forms for workers over the past three years.
  • Not currently being audited by the Department of Labor or IRS for misclassification.

Those who are interested in applying can fill out Form 8952, Application for Voluntary Classification Settlement Program at least 60 days before beginning to treat workers as employees. Along with this form, the name of a contact with a Power of Attorney (Form 2848) needs to be submitted.

For more information, visit the Employment Tax page or Announcement 2011-64.