In a BLR webinar titled “Independent Contractor or Employee? How to Use the IRS’ New Relief Program,” Vicki M. Lambert, CPP, explained that under the new IRS Voluntary Classification Settlement Program (VCSP), employers have an opportunity to resolve past misclassifications regarding independent contractors, restore their current tax compliance, and reduce the burden of misclassification down the road.

In a related article, Lambert advised how employers can utilize the VCSP to resolve any independent contractor/employee misclassifications. Here, she explains the requirements for employer participation in the VCSP.

“I Incorrectly Classified Independent Contractors: Am I Eligible to Participate?”

The VCSP is available for taxpayers/employers who want to voluntarily change the prospective classification of their workers; it applies to employers who are currently treating their workers as independent contractors or other non-employees. In the webinar, Lambert confirmed: “if you have employees that should be employees and you're treating them as independent contractors—or you have another ‘non’-type employee that you're treating them as—then this program is available for you.”

The reclassification can be for a worker or class or group of workers, but the employer must want to prospectively treat the workers as employees. Lambert advised: “if they find that you went through this program and then you went back and reclassified them again incorrectly, the penalties will be huge. So, you must want to actually put your workers in the right classification, not just to avoid an audit right now.”

The employer must:

• Want to voluntarily reclassify certain workers as employees (instead of independent contractors or other non-employee statuses) for federal employment taxes including the federal income tax withholding (FIT), Federal Insurance Contribution Act (FICA), and federal unemployment tax act (FUTA) taxes for future tax periods
• Be presently treating the workers as non-employees
• Have satisfied any Form 1099 requirements for each of the workers for the 3 preceding calendar years
• Have consistently treated the workers as non-employees
• Have no dispute with the IRS as to whether the workers are non-employees or employees for federal employment tax purposes

The employer must not:

• Be under examination by the IRS, the Department of Labor (DOL), or by any state agency for the proper classification of the workers
• Have been examined previously by the IRS or DOL for the classification of workers (an employer who was previously audited by IRS or Department of Labor concerning classification of workers will be eligible if taxpayer has complied with results of that audit; employers under IRS examination must use current CSP to resolve federal unemployment tax issues related to worker classifications).

For more information on classifying independent contractors correctly, order the webinar recording. To register for a future webinar, visit http://catalog.blr.com/audio.

Vicki M. Lambert is a Certified Payroll Professional with more than 30 years of multi-state payroll experience. She is founder and director of The Payroll Advisor, a firm that provides unique and expert services for business owners and other professionals dealing with the complexities and technicalities of the payroll process.