An increasing number of businesses rely on freelance workers and independent contractors. For businesses, the challenge is knowing the line between independent contractors and employees. The IRS classifies the two differently, and businesses can face audits and penalties for improperly classifying workers.

In general, employees receive a W-2. Independent contractors receive a Form 1099. Employers who improperly classify employees as independent contractors can face steep penalties for failing to pay employment taxes, such as the payroll tax, and violating other laws.

Under the Voluntary Classification Settlement Program (VCSP), businesses can avoid these penalties by reclassifying independent contractors as employees. Those who opt into the VCSP can receive partial relief from federal employment taxes.

Who is Eligible for the VCSP?

To qualify for VCSP, businesses cannot be under any of the following:

• An employment tax audit by the IRS
• An audit related to worker classification by the Department of Labor
• Any audit or similar procedure related to worker classification by a state government agency

Businesses that have previously been under an audit may qualify if they complied with the results of the audit and aren't currently contesting that audit.

A business must have filed all required Forms 1099 for the previous three years. This applies to all independent contractors who are slated to be reclassified as employees.

What are the Advantages of the VCSP?

When participating in the VCSP program, a business taxpayer agrees to classify workers as employees for future tax periods. The taxpayer benefits because:

• They will pay 10 percent of the employment tax liability on the compensation for the reclassified workers for the most recent tax year.
  • This amount is set by the Internal Revenue Code, with more information available on Instructions to Form 8952.
• They won't be liable for any interest or penalties on that amount.
• They won't be subject to employment tax audits for prior years that relate to worker classification for the workers reclassified under the VCSP.

Eligible taxpayers can apply for the program using Form 8952.

If you have questions about the VCSP or other tax issues related to worker classification, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.