IRS Voluntary Classification Settlement Program (VCSP): Employee or Independent Contractor?

The Voluntary Classification Settlement Program (VCSP) is  a program offered by the Internal Revenue Service that provides an opportunity for taxpayers to voluntarily reclassify their workers as employees for tax purposes. The VCSP extends to the taxpayer partial relief from federal employment taxes per the terms of their closing agreement. To participate in this voluntary program, the taxpayer must meet certain eligibility requirements and apply to participate in the VCSP by filing Form 8952, Application for Voluntary Classification Settlement Program. Furthermore, the VCSP, originally launched September 21, 2011, has been modified to:

  • Permit a taxpayer under IRS audit, other than an employment tax audit, to be eligible to participate in the VCSP
  • Clarify the current eligibility requirement that a taxpayer who is a member of an affiliated group within the meaning of section 1504(a) is not eligible to participate in the VCSP if any member of the affiliated group is under employment tax audit
  • Clarify that a taxpayer is not eligible to participate if the taxpayer is contesting in court the classification of the class or classes of workers from a previous audit by the IRS or Department of Labor; and
  • Eliminate the requirement that a taxpayer agree to extend the period of limitations on assessment of employment taxes as part of the VCSP closing agreement with the IRS.

Program Eligibility Requirements

To be eligible for participation in the VCSP, a taxpayer must have consistently treated the workers as independent contractors or other nonemployees, including having filed all required Forms 1099 for the workers to be reclassified under the VCSP for the previous three years to participate.

Additionally, the taxpayer cannot currently be under employment tax audit by the IRS and the taxpayer cannot be currently under audit concerning the classification of the workers by the Department of Labor or by a state government agency.

If the IRS or the Department of Labor has previously audited a taxpayer concerning the classification of the workers, the taxpayer will be eligible only if the taxpayer has complied with the results of that audit and is not currently contesting the classification in court.

VCSP Application Process

To participate in the VCSP, a taxpayer must apply using Form 8952, Application for Voluntary Classification Settlement Program. The application should be filed at least 60 days prior to the date the taxpayer wants to begin treating its workers as employees.

Along with the application, the taxpayer may provide the name of a contact or an authorized representative with a valid Power of Attorney (Form 2848).  However, the taxpayer, and not the taxpayer’s representative, is required to sign Form 8952. The IRS will contact the taxpayer or authorized representative to complete the process after reviewing the application and verifying the taxpayer’s eligibility. Finally, eligible taxpayers accepted into the VCSP will enter into a closing agreement with the IRS to finalize the terms of the VCSP, and will make full payment of the amount due under the closing agreement.

VCSP Agreements

A taxpayer participating in the VCSP will agree to treat the class or classes of workers as employees for future tax periods. In exchange, the taxpayer will:

  • Pay 10 percent of the employment tax liability that would 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;
  • Not be liable for any interest and penalties on the amount; and
  • Not be subject to an employment tax audit with respect to the worker classification of the workers being reclassified under the VCSP for prior years.

For anyone who wants to reclassify their workers but isn’t sure what to do, Daniel Rosefelt & Associates, LLC, Attorney & CPA recommends that you consult with  an experienced tax attorney versed in the intricacies of classification settlement practice.