The IRS has recently announced the launch of its new Voluntary Compliance Settlement Program (VCSP); an effort to enable employers to resolve past worker classification issues by paying a reduced tax in exchange for reclassification of independent contractors as employees in the future. According to IRS Commissioner Doug Shulman, “this settlement program provides certainty and relief to employers in an important area. This is part of a wider effort to help taxpayers and businesses to help give them a fresh start with their tax obligations.”
The proper classification of a worker as either an independent contractor or employee is an important one for both the employer and the worker. Where an employer treats a worker as an independent contractor, the employer withholds no taxes from the amounts paid to the worker and the worker must pay self-employment tax (SE tax) as well as income tax. SE tax is a Social Security and Medicare tax levied on individuals who work for themselves and is similar to the Social Security and Medicare taxes that are withheld from the pay of most employees by the employer. For each calendar year, the employer must prepare a Form 1099 reporting the gross amount paid to the worker during the year, and send copies to the IRS and to the worker by the succeeding January 31.
Where an employer treats a worker as an employee, the employer must withhold income tax from the employee’s wages, as well as Social Security tax at 6.2% on the first $106,800 of gross wages earned during a calendar year, and Medicare tax at 1.45% of gross wages without limit. The employer must deposit the withheld income tax, Social Security tax, and Medicare tax, as well as a matching amount of Social Security tax and Medicare tax, with the IRS. Each quarter the employer must also prepare and file with the IRS a Form 941, Employer’s Quarterly Tax Return. For each calendar year, the employer must prepare a Form W-2 reporting the employee’s gross pay, tax withholdings, and net pay and submit copies to both the IRS and the employee by the succeeding January 31.
The VCSP is available to private employers, tax-exempt organizations and government entities. To be eligible, an applicant must:
(1) Have consistently treated the workers in the past as nonemployee contractors;
(2) Have filed all required Forms 1099 for the workers for the previous three years; and
(3) Not currently be under audit by the IRS, the Department of Labor, or a state agency concerning the classification of the workers at issue.
Employers may apply for the VCSP by filing Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before they want to begin treating the workers as employees. The IRS will then determine whether the taxpayer is eligible, and, if so, will contact the taxpayer to complete the process. The IRS retains discretion to reject any taxpayer from the VCSP, including those that otherwise meet the basic eligibility criteria.
A taxpayer participating in the VCSP will agree to prospectively treat the class or classes of workers as employees for future tax periods. In exchange, the taxpayer:
(1) Will pay 10% of the employment tax liability that would otherwise 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 (IRC);
(2) Will not be liable for any interest and penalties on the amount; and
(3) Will not be subject to an employment tax audit with respect to the previous classification of the workers being reclassified under the VCSP.
If you have employment related tax questions, contact an Attorney in Jacksonville who can assist you today.