A worker's classification, as either an employee or independent contractor, impacts the amount of payroll tax for which the business is responsible. An employer must withhold income and FICA tax, as well as pay the employer share of FICA tax, on the wages of a worker who is an employee. A worker who is an independent contractor is solely responsible for the payment of self-employment and income taxes on his or her earnings. The cost of misclassification to employers in additional taxes, as well as administrative time, or the loss of tax-favored status for employee benefit plans, can be steep.
However, the IRS now offers the VCSP that allows businesses to voluntarily reclassify their workers at a relatively low cost. To be eligible for the VCSP, an employer must: (1) consistently have treated the workers in the past as nonemployees; (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 these workers.
Interested employers can apply for the program by filing Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before they want to begin treating the workers as employees. Employers accepted into the program will pay an amount effectively equaling just over one percent 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. Participating employers will, for the first three years under the program, be subject to a special six-year statute of limitations, rather than the usual three years that generally applies to payroll taxes.
If you are interested in this program or would like additional information on the correct classification of workers, please call our office.