Articles

Voluntary Worker Classification Settlement Program Implemented by the IRS

Date: October 6, 2011

Employers can save money on past payroll taxes and “get right” with the IRS under new program.

The Internal Revenue Service has implemented a new program that will allow employers, including tax-exempt organizations, to resolve past worker classification issues by voluntarily reclassifying workers as employees.  The IRS's Voluntary Classification Settlement Program is primarily intended to increase tax compliance, but the Program will also have the effect of minimizing the reporting and financial burden on employers, as well as providing certainty for employers, workers, and the government regarding worker classification.  The Program will allow employers the opportunity to come into compliance by making a payment covering past payroll tax obligations.

An eligible employer can obtain relief from federal payroll taxes owed by the employer in the past, if the employer prospectively treats workers as employees.  The Program is designed for employers that incorrectly classified current workers as non-employees or independent contractors, but now want to correct the worker classification to classify those workers as employees.

Employers that are accepted into the Program will pay an amount equaling approximately one percent of the wages paid to the reclassified workers for the past year.  Participating employers will not be audited on payroll taxes related to those workers for prior years, and the employers will not be responsible for interest or penalties.  Employers participating in the Program will be subject to a special six-year statute of limitations for the first three years under the Program as opposed to the standard three-year statute of limitations that generally applies to payroll taxes.

Who is eligible:  In order to be eligible for the Program, the employer must (i) have consistently treated the workers as nonemployees in the past, (ii) have filed all required IRS Form 1099's for the workers for the previous three years, and (iii) not currently be under audit by the IRS, the Department of Labor, or a state agency regarding worker classification.  To apply for the Program, an employer must file IRS Form 8952 at least sixty days before the employer wants to begin treating the workers as employees.

Caution:  An employer interested in applying for the Program should consult with legal counsel before contacting the IRS because an employer's participation in the Program may result in other or unanticipated reporting and financial obligations to other federal and state agencies.