IRS Provides Voluntary Program for Employees Who Have Misclassified 1099 Workers

The IRS has developed the Voluntary Classification Settlement Program (“VCSP”) to encourage employers to voluntarily reclassify, for all future tax periods, as employees their workers who have incorrectly classified as independent contractors or other nonemployees.  This program offers participants limited federal employment tax liability for the past nonemployee treatment and also provides audit relief for the previous years.  

Distinguishing whether a worker’s classification is as an employee or nonemployee depends on whether the employer has the right to direct and control the worker’s performing of the services rendered. 

To be eligible to participate in the VCSP, the employer:

•             Must have consistently treated workers as nonemployees

•             Must have filed all required Forms 1099 for those workers for the previous three years. 

•             Cannot be currently under audit by the IRS and cannot be currently under audit concerning the classification of the workers by the Department of Labor or by a state agency. 

Employers who are interested in participating in the VCSP must apply to the IRS for inclusion in the program.  If accepted, the employer must agree to prospectively treat those identified workers as employees for all future tax periods.  The employer must also pay 10% of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year.

The employer will not be liable for any interest or penalties on the liability and will not be subject to an employment tax audit with respect to the classification of the workers for prior years.

The IRS has stated that an employer’s participation in the VCSP does not admit any liability for wrongdoing for past tax periods.  In addition, employers who are’ concerned about potential wage and hour violations associated with worker misclassification in the participation of this program need to know that the IRS has stated that it will not share information about participants with the Department of Labor or state agencies. 

If you are not sure whether your worker qualifies as a 1099 worker, please contact Lauren Brenner.