A significant portion of a company’s tax entanglements often involves employee misclassification. Although employers are sometimes not up to date on changes to employment law, by avoiding employee withholding taxes for some or all of their workers, many seek to keep their operating costs down by also avoiding worker’s compensation and other employee benefits.
Unfortunately, companies engaging in such practices also run the risk of liability for tax employment fraud. Along with aggressive efforts to close the loopholes of this tax gap created by noncompliance with employment tax laws, the IRS has developed a voluntary settlement program that is designed to entice companies into reclassifying their workers in exchange for tax relief and prior year audits. Proactively settling with the IRS may be an attractive option for companies under these circumstances.
Terms and conditions of the VCSP
The IRS provides options for noncompliant companies through the Volunteer Classification Settlement Program that help employers to resolve past worker classification issues. By preemptively approaching the IRS, companies are in a better negotiating position to not only reduce penalties but also potential personal liability.
To meet eligibility requirements, the employer must have:
- Regularly classified workers as nonemployees
- Filed 1099 forms for these workers in the most recent three years
- Not be under current audit by the IRS or the Department of Labor (DOL) concerning worker classification
- File VCSP application Form 8952 at least 60 days in advance of reclassifying workers as employees
For companies that have been under a previous audit by the IRS or DOL concerning worker classification, eligibility will depend on the taxpayer’s compliance with that audit and if the taxpayer is not currently contesting the classification in court.
In exchange for agreeing to reclassify a class of workers as employees for future tax periods, VCSP agreements provide that employers will:
- only pay 10% of employment tax liability that would be due for compensation paid to workers for the most recent tax year
- not be held liable for interest or penalties on this amount
- no longer be subject to employment tax audits regarding worker classification for previous years
For Washington, D.C. employers who may have concerns about their business’s tax liability issues, it is important to have reputable legal counsel to assist with resolving tax compliance problems.