IRS Recently Announced a Voluntary Classification Settlement Program for Worker Misclassification as a Contractor

Misclassification of an employee as an independent contractor can be detrimental to any business. The IRS requires that businesses report income paid to employees properly to ensure proper collection of taxes and Social Security payments. However, defining who is an employee and who is an independent contractor can be difficult even in the best situations.

The IRS has announced a new program that may provide some help. The program is called the Voluntary Classification Settlement Program. This is an optional program. It gives taxpayers a unique opportunity to reclassify their workers as employees. This is done for future tax periods for employment tax purposes. What makes this program interesting is that it provides partial relief from federal employment taxes for eligible taxpayers. The taxpayers must agree, though, prospectively to treat those that work for them as employees. There are eligibility requirements to enroll in this program.

Why is it important? Misclassification of workers is a serious problem for taxpayers. If you have no basis for treating a worker as an independent contractor rather than an employee, you could be held liable for employment taxes for that individual. In that case, any relief provisions will not apply. The Voluntary Classification Settlement Program provides an opportunity to obtain some relief from the costs associated with employee taxes. To obtain the latest requirements for this program, fill out IRS Form 8952, Application for Voluntary Classification Settlement Program. You will then need to enter into a formal agreement through the program with the IRS.

By doing this it can provide many employers with a safety net necessary to avoid costly employment taxes. However, it does not provide blanket protection. If your workers should be classified as employees under the IRS laws, you cannot avoid the requirement for paying employee taxes.