Voluntary Classification Settlement Program (VCSP)

The IRS Voluntary Classification Settlement Program (VCSP) provides a unique opportunity for eligible employers to reclassify their workers as employees for employment tax purposes, offering a streamlined path to compliance with federal tax laws while minimizing the risk of penalties and enforcement actions

The VCSP is a voluntary program administered by the IRS that allows qualifying employers to proactively reclassify their workers as employees for federal employment tax purposes. By participating in the VCSP, employers can address potential worker classification issues head-on, reducing their exposure to penalties and other consequences associated with misclassification.

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Eligibility Criteria

To qualify for the VCSP, employers must meet certain eligibility criteria set forth by the IRS, including:

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    Consistently treated workers as independent contractors or non-employees in the past.
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    Filed all required Forms 1099 for the workers to be reclassified for the previous three years.
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    Not currently under audit by the IRS, Department of Labor, or a state agency concerning the classification of the workers.

Employers who meet these criteria may voluntarily apply for the VCSP to reclassify their workers and achieve compliance with federal employment tax laws. To participate, an employer must submit Form 8952, Application for Voluntary Classification Settlement Program, at least 120 days before the desired reclassification effective date.

Consequences of Misclassification

Misclassifying an employee as an independent contractor without a reasonable basis can result in significant liabilities for the employer, including taxes, penalties, and even potential criminal charges. An employer who misclassified a worker may be liable for unfiled employment tax forms, a portion of the employee’s unpaid income tax and Federal Insurance Contributions Act (FICA) contributions, the employer’s share of FICA, and Annual Federal Unemployment Tax (FUTA) taxes. In cases of suspected intentional misconduct or fraud, employers may face additional fines, penalties, and even imprisonment for up to one year.

Benefits of Participation in VCSP

Participating in the VCSP offers numerous benefits for eligible employers, such as:

Reduced Tax Liability: Employers accepted into the VCSP pay only 10% of the employment tax liability that would have been due on compensation paid to the reclassified workers for the most recent tax year.

Relief from Certain Penalties and Interest: Employers accepted into the VCSP are not subject to penalties and interest on the reduced tax liability.

Prospective Compliance: By voluntarily reclassifying workers as employees, employers can achieve compliance with federal employment tax laws moving forward and avoid employment tax audits related to the reclassified workers’ prior classification.

Navigating the VCSP Process

Successfully navigating the VCSP process requires careful consideration of eligibility criteria, completion of required forms and documentation, and strict adherence to IRS guidelines. Employers considering VCSP participation should consult with a knowledgeable tax professional to assess their eligibility, assist with the application process, and ensure full compliance with program requirements.

At Azarvand Tax Law, our team of experienced tax attorneys and CPAs are dedicated to helping you navigate the complexities of the VCSP process. Contact us at Info@AzarvandTaxLaw.com or visit our Contact Us page to schedule a complimentary 30-minute consultation. Take the first step toward exploring how the VCSP can help your business achieve compliance with employment tax laws while minimizing potential liabilities.