The Voluntary Classification Settlement Program (VCSP) has a temporary eligibility expansion available to taxpayers who are currently treating their workers as independent contractors or other non-employees and want to reclassify the workers as employees. Eligible taxpayers who take advantage of this temporary eligibility expansion can voluntarily fix worker classification errors and pay a modest penalty.
The VCSP was originally created in 2011 to encourage companies to correct the increasing number of worker misclassifications. Designating an employee vs. an independent contractor is generally determined by whether the company has the right to direct and control the worker as to how to perform the services rendered. Reclassifying a worker to an employee will require the company to withhold income taxes Social Security and Medicare taxes from employees pay the employer’s share of the Social Security and Medicare taxes and pay federal and state unemployment taxes. Companies using services from independent contractors are required to provide the worker with a 1099-Misc form for services that total $600 or more.
To be eligible for the VCSP extension a taxpayer must have consistently treated the workers as non-employees over past years and cannot be under an employment tax audit by the IRS.
Companies participating in the VCSP extension program must:
- Treat the class of workers as employees for future tax periods.
- Pay 25 percent of the employment tax liability that would have been due on compensation paid to the workers being reclassified for the most recent tax year.
- Pay a reduced penalty for unfiled 1099 forms for the previous three years for the workers being reclassified.
Also companies will not be liable for any interest or penalties on the liability or subject to an employment tax audit with respect to the class of workers for prior years.
If your company is interested in learning more about the Voluntary Classification Settlement Program Temporary Expansion contact us at Lindemeyer CPA.