misclassification of independent contractors

The decision to classify a worker as an independent contractor, rather than as an employee, carries significant legal implications. Misclassifying employees as independent contractors can result in employer liability for unpaid payroll taxes, unpaid unemployment and workers’ compensation premiums, and responsibility for failure to provide the various rights afforded under employment laws to employees but

We first introduced you to the Voluntary Compliance Settlement Program (VCSP), a program launched on the on the heels of the IRS announcing its three-year plan to increase audits of independent contractors (Announcement 2011-64), last September. In that post, we discussed the potential advantages and pitfalls of the VCSP. This post takes another look into the VCSP in light of the IRS’s FAQs, which answers a lot of taxpayers’ concerns but not all of them.

By way of background, the VCSP was designed to provide eligible employers partial relief from the federal employment taxes and penalties that typically result from misclassifying workers as independent contractors. The VCSP is supposed to work like an amnesty program. It offers eligible taxpayers a one-time chance to come forward and reclassify their improperly-classified independent contractors as employers for future tax periods with limited federal employment tax liability for the past nonemployee treatment. Employers accepted into the program pay an amount 10% of the employment tax liability (calculated at reduced rates) effectively equaling just over 1% of the wages paid to the reclassified workers for the most recent tax year – a substantial savings – due with the signed VCSP closing agreement to the IRS. The kicker… no interest or penalties and no audit on payroll taxes related to the reclassified workers.

Many taxpayers quickly lost faith in the VCSP when they learned that the IRS and the Department of Labor (DOL) entered into a Memorandum of Understanding (MOU) agreeing to share information and other data relating to worker misclassification. The MOU also provided for information-sharing agreements between the IRS and state taxing authorities and raised a huge red flag for employers: Is the IRS going to share my information with the DOL and/or state/local taxing authorities and open up a whole new can of worms for me?

Taxpayers Can Breathe a Little Easier, But Don’t Go Getting Too Comfortable: Well, the answer to this all-important question, among 21 others, was provided in a FAQ sheet on the VCSP concerns. Some of the high points are:

  • Despite the MOU, the IRS will not share information about VCSP applicants with the DOL or state agencies. So, while the IRS will share some information about employee misclassification with the DOL and state taxing agencies, it will not share applicant information.
  • Taxpayers who apply to the VCSP but who are rejected will not automatically trigger initiation of a Federal audit. Mind you, taxpayers may be audited for something else, but not for applying for the VCSP.
  • By signing the VCSP closing agreement, a taxpayer is not admitting liability for wrong during past years. The VCSP addresses future years only.


Continue Reading The IRS Voluntary Compliance Settlement Program (VCSP): Does it Offer Employers Amnesty or Put a Target on Their Backs? The Answer … Probably a Little Bit of Both