While it's not always easy determining whether an individual is an independent contractor or employee, there's a lot at stake if you get it wrong. An employer, of course, has to withhold income and other taxes, as well as pay unemployment taxes and half of an employee’s Social Security and Medicare taxes. But you don’t have to do any of these things when you hire an independent contractor.
In recent years, however, the Internal Revenue Service (IRS) has stepped up worker classification audits to try to reduce the tax gap caused by the disconnect between what the IRS should be collecting and what it's actually collecting. And now, to help ramp up compliance even further, the IRS has announced a new program to encourage businesses who may be getting the classification wrong to voluntarily reclassify independent contractors as employees.
The Voluntary Classification Settlement Program (VCSP) was rolled out on September 21, 2011. Eligible employers get a break from the sizable employment tax liability, penalties and interest they would have faced from reclassifying workers, whether voluntarily or due to an audit.
To qualify to participate in the VCSP, you must:
=> have consistently treated the workers as independent contractors and filed all required Forms 1099 for the previous three years
=> agree to extend the statute of limitations by three years for employment tax assessments for the first three years beginning on the date the VCSP closing agreement is signed
=> not currently be under audit by the IRS, the Department of Labor or any state agency regarding worker classification
Keep in mind, too, that you must apply for the VCSP at least 60 days before the date you plan to reclassify the workers.
For additional insight on the Voluntary Classification Settlement Program, check out the FAQs on the IRS website.