Potential Fix: IRS Reprieve on Misclassification Issue

Some companies have mistakenly treated workers as independent contractors, as opposed to employees. Once this issue is identified, employers struggle with how to fix the problem without creating bigger problems.

Over the past year, the IRS has offered a voluntary program that provided relief for some employers who have voluntarily chosen to reclassify their workers as employees. The Voluntary Classification Settlement Program (VCSP) has been of limited usefulness because most employers are barred from applying for the VCSP if they have failed to file the required Form 1099s with respect to the workers they are seeking to reclassify, or were under an IRS audit.

On February 27, 2013, the IRS announced that it was revamping and expanding the VCSP. For the next four months (until June 30, 2013), the IRS is waiving the requirement that the employer has to file past Form 1099s, and has also agreed that employers who are under IRS audit may qualify as long as the audit doesn’t involve an employment tax audit. Details of this temporary change are in Announcement 2012-46.

Interested employers can apply for this program by filing Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before they begin treating workers as employees. Employers accepted into the VCSP will generally pay an amount equaling just over 1% of the wages paid to the reclassified workers for the past year. No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years. Those employers who have previously failed to file Form 1099s will pay a slightly higher amount and there are some additional requirements.