IRS Voluntary Worker Classification Settlement Program

A constant source of friction between the IRS and taxpayers is over the classification of workers. Are the workers employees or independent contractors? If they are employees, the employer must withhold income and payroll taxes from their wages and pay the employer's share of the applicable payroll taxes. The IRS has developed a new program, the Voluntary Classification Settlement Program (the "VCSP"), that allows employers to prospectively reclassify workers as employees instead of independent contractors or other non-employees. The VCSP provides partial relief from past employment taxes by requiring eligible taxpayers to pay only 10% of the employment tax liability that would otherwise have been due on compensation paid for the most recently closed tax year as determined by reduced rates. According to the IRS, employers accepted into the program will pay an effective amount equal to just over one percent of the wages paid to the reclassified workers for the past year.