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Treating Workers who are classified as Independent Contractors as Employees

Taking Advantage of the New IRS Worker Classification Settlement Program

By Robert S. Schriebman, SJD

You would usually find me writing an article about treating employees as independent contractors. This article is a switch. Here we will look at the reverse process. An employer has been treating its workers as independent contractors. Worried about a future audit, the employer now wants to treat these independent contractors as employees to avoid future exposure. The IRS has recently come up with a new program called the Voluntary Classification Settlement Program (VCSP). This new program will enable employers to voluntarily reclassify their workers for federal employment tax purposes and take advantage of a reduced penalty and audit protect. The IRS has also released Form 8952, Application for Voluntary Classification Settlement Program, and instructions and posted frequently asked questions (FAQs) about the VCSP on the IRS's website.

The VCSP is open to employers currently treating their workers as independent contractors and who want to treat these workers as employees in the future. To be eligible the "employer" must have consistently treated the workers as non-employees, and must have filed 1099s for these workers for the three preceding calendar years ending before the date Form 8952 is filed with the IRS. If the employer has been in business for less than three years the filing requirement will be deemed satisfied if the employer has provided 1099s to workers for the time they have worked for the employer.

To be eligible the employer can not be currently under audit by the IRS or Department of Labor. If an employer has been audited previously it is best to consult with competent counsel before completing Form 8952. Form 8952 must be filed at least 60 days from the date the employer wants to begin treating its workers as employees. If the employer is accepted into the VCSP, the IRS will contact the employer to enter into a closing agreement.

As part of the VCSP, employers must agree to the following three conditions:

  • Employers will pay a percentage of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year, determined under the reduced rates of Code § 3509(a).
  • Employers will not be liable for any interest and penalties on the amount; and
  • Employers will not be subject to an employment tax audit with respect to the worker classification of the workers being reclassified under the VCSP for prior years.

NOTE: THE CALIFORNIA EMPLOYMENT DEVELOPMENT DEPARTMENT (EDD) DOES NOT HAVE A VCSP INITIATIVE. THERE IS NO SUCH "AMNESTY" FOR THE EDD. SUDDENLY TREATING INDEPENDENT CONTRACTORS AS EMPLOYEES FOR IRS PURPOSES MAY REQUIRE YOU TO TREAT THEM THE SAME WAY FOR EDD PURPOSES. THIS COULD EXPOSE YOU TO AN EDD AUDIT WITH NO REDUCED PENALTIES OR INTEREST.

© Copyright 2011. No part of this article may be taken and used in any way whatsoever

without the express written consent of Robert S. Schriebman

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, "IRS Tax Collection Procedures - A Manual for Practitioners" published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See "California Tax Collection Practice and Procedures" and "California Taxation Practice and Procedure", both published by Commerce Clearing House.