IRS Announces a Helpful Voluntary Worker Classification Settlement Program
Corporate Department Publications
December 1, 2011
In order to facilitate voluntary resolution of worker classification issues and provide some certainty to taxpayers, workers, and the Internal Revenue Service (“IRS”), the IRS has developed a new program to allow taxpayers to voluntarily re-classify workers as employees for federal employment tax purposes outside of an IRS examination context. The Voluntary Classification Settlement Program (“VCSP”) permits taxpayers to reclassify workers as employees for future tax periods with limited federal employment tax liability for past years when those workers were treated as non-employees. The initial announcement of the VCSP initiative by the IRS was on September 21, 2011, and its official publication was in IRS Announcement 2011-64 (October 11, 2011), as part of Internal Revenue Bulletin 2011-41.
To be eligible for the VCSP, a taxpayer must have consistently treated the workers (or a class or group of workers) as non-employees, and must have filed all required IRS Forms 1099 for the workers for the previous three years. The taxpayer cannot currently be under audit by the IRS, or under audit concerning the classification of workers by the Department of Labor or any state government agency. A taxpayer who was previously audited by the IRS or the Department of Labor concerning the classification of the workers will only be eligible for the VCSP if the taxpayer has complied with the results of that audit. Exempt organizations and governmental entities may participate in the VCSP if they meet all of the eligibility requirements.
To participate in the VCSP, a taxpayer must apply using IRS Form 8952, Application for Voluntary Classification Settlement Program. This Form should be filed at least sixty (60) days prior to the date the taxpayer wants to begin treating the subject workers as employees. A taxpayer participating in the VCSP will need to agree to treat the class of workers as employees for future periods. In exchange, the taxpayer will need to pay only ten percent (10%) of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year, determined under the reduced rates of Internal Revenue Code (the “Code”) Section 3509. The taxpayer will not be liable for any interest and penalties on the liability, and will not be subject to an employment tax audit with respect to the worker classifications of those workers for prior years.
For example, assume that in the year 2010, a taxpayer paid $1,500,000 to workers that are the subject of the VCSP. Assume that all of these workers were compensated at or below the Social Security wage base (under $106,800 for the year 2010). The taxpayer submits the VCSP application on October 1, 2011 and wants the beginning date of the quarter for which it wishes to treat the class or classes of workers as employees to be January 1, 2012. The taxpayer looks to the amounts paid to the workers in 2010 for purposes of calculating the VCSP amount, since 2010 is the most recently completed tax year at the time the VCSP application is filed. Under Code Section 3509(a), the employment taxes applicable to $1,500,000 would be $160,200 (10.68% of $1,500,000). Under the VCSP, the taxpayer’s payment would be ten percent (10%) of $160,200, or $16,020.
Note that a taxpayer participating in the VCSP will need to agree to extend the statute of limitations on assessment of employment taxes for three years for the first, second, and third calendar years beginning after the date on which the taxpayer has agreed under the VCSP closing agreement to begin treating workers as employees. This agreement will effectively extend the normal three-year statute of limitations on payroll taxes to six years.
For taxpayers under IRS examination, the current Classification Settlement Program (“CSP”) is available to resolve federal employment tax issues relating to worker misclassification, if certain criteria are met. The CSP permits the prospective re-classification of workers as employees, with reduced federal employment tax liabilities for past non-employee treatment.
Businesses that have concerns about their worker classifications but who are uncertain as to whether or not they should apply to participate in the VCSP should note that IRS Commissioner Douglas H. Shulman has emphasized that the IRS would maintain a “robust audit program” for taxpayers who have deliberately skirted the law. As background, whether a worker is performing services as an employee or as an independent contractor depends upon the facts and circumstances, and is generally determined under the common law test of whether the service recipient has the right to control workers as to how services are performed. This test is very fact sensitive, and can be burdensome to apply.
As indicated above, taxpayers wishing to participate in the VCSP must submit IRS Form 8952 to participate in the program, but the IRS retains discretion of whether to accept a taxpayer’s application for the VCSP. Those taxpayers whose applications are accepted will enter into a closing agreement with the IRS to finalize the terms of the VCSP, and will simultaneously be required to make full and complete payment of any amount due under the closing agreement.
Please see the IRS website for a copy of Form 8952.
Given the significance and potential complexity of this issue for service recipients, we strongly recommend that interested taxpayers discuss the VCSP with their professional tax advisors to determine if they should take advantage of the opportunity offered by the VCSP.
This alert was written by Peter J. Ulrich, Director, and Leonard G. Sprishen, Associate, with the Gibbons Corporate Department in its Newark office. If you have any questions regarding the Voluntary Classification Settlement Program, please contact either Peter J. Ulrich or Leonard G. Sprishen.