On September 21, the Internal Revenue Service announced the launch of the Voluntary Classification Settlement Program (VCSP), a new voluntary and low cost program to allow employers to reclassify as employees for future tax periods workers who had been misclassified as independent contractors.

In order to encourage the proper classification of workers, the program is closed to taxpayers currently under audit for misclassification where the audit is being carried out by the IRS, the Department of Labor, or a state agency.

The taxpayer must meet certain requirements to participate in VCSP. The requirements are that the taxpayer must have (i) consistently treated workers as nonemployees; (ii) filed Form 1099s for those workers for the previous three years; and (iii) the employer must agree to prospectively treat the reclassified workers as employees for future tax periods. The qualifying employer must then apply to participate and, if accepted, enter into a closing agreement with the IRS.

A participating employer must then pay ten (10) percent of the employment tax liability that would have been due on compensation paid to the worker for the most recent tax year under the reduced rates of Section 3509 of the Internal Revenue Code. The employer will be released from any interest and penalties on liability and will not be subject to audit for the reclassified workers. The taxpayer must also agree to extend the statute of limitations on assessment of employment taxes for three years for the first through third calendar years beginning on the date the workers have been reclassified as employees under the closing agreement.

Interested employers should submit an application to the IRS, which must include the name of the authorized representative with a valid Form 2848 (Power of Attorney). Employers should note that the IRS is under no obligation to accept the application for VCSP.

The IRS announcement can be accessed here.