Worker Misclassification Forgiveness Program Expanded

A year and a half after it was launched, the Voluntary Classification Settlement Program (VCSP) is not only still available, it has been expanded.

Through the program, employers who voluntarily reclassifiy 1099 independent contractors (ICs) as W-2 employees will only be required to repay a small portion of the back payroll taxes they owe. According to The Wall Street Journal, 1,000 employers have taken advantage of the VCSP since it was established in 2011.

Now even more employers will be able to take advantage of it. Previously, those going through an IRS audit were not eligible for the program. It also left out employers who had not filed 1099s on ICs for the previous three years.  

Employers can now apply for the program even if they are under an IRS audit unless it is an employment tax audit, which is still excluded. additionally, a temporary expansion has been provided for those that did not file 1099s for ICs in the past three years, allowing them to apply for the program between now and June 30.

Under the revised program, the employer must meet the following criteria to qualify:

  1. The workers they want to reclassify must have been consistently treated as nonemployees in the past and must be treated as such at the time of application.
  2. The employer must not be under an audit regarding payroll taxes.
  3. The employer cannot be under DOL or state agency audits regarding the classification of workers.

Employers can apply for the VCSP by filling out Form 8952. If accepted into the program, they will pay about 10% of the payroll tax liability that should have been due for the past tax year (equal to about one percent of the wages paid to the workers in that year). However, those that failed to file 1099s properly will owe more in wages and penalties, plus they will need to file a complete 1099 for each worker they hope to reclassify.

Whether or not your clients enroll in this formal program to reclassify their ICs, they should conduct an internal audit ensure that anyone who is classified as an IC meets the IRS guidelines.  The IRS has been cracking down on the misclassification of workers over the past few years. In fact, they have collected $9.5 million in back taxes for more than 11,400 workers who were determined to be misclassified since September 2011, according to The Wall Street Journal.

You can help your clients by offering to convert 1099 ICs to contractors who become W-2 employees of a contract staffing back-office. The back-office takes on all the employment responsibilities, including paying the employer portion of taxes, administering and paying the employer portion of benefits (and complying with healthcare reform), payroll processing and funding, Workers' Compensation, all state and federal tax withholdings, employee issues, and more. That way, the employer can still avoid the administrative hassles and additional costs that come with W-2 employees without worrying about the possibility of an IRS audit.

Debbie Fledderjohann is the President of Top Echelon Contracting, Inc.

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