IRS Worker Classification Settlement Program IRS Form 8952 - John R. Dundon II, Enrolled Agent
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IRS Worker Classification Settlement Program IRS Form 8952

IRS Worker Classification Settlement Program IRS Form 8952

If you are an employer you can appreciate the fact that everyone working for you it seems wants to be an independent contractor until they get injured on the job or get pissed off at you and seek relief outside of your organization. Employees and the subsequent employment tax liability they bring can be a real kick in the pants. If you have taken the risk of actually having employees then you may be keenly aware that it has become practically impossible to compete for prospective business if the competition is using improperly classified workers as independent contractors and subsequently avoiding payroll tax liabilities. It seems these days that operating margins across all industry groups are razor thin and getting undercut on bids by a competitor who is not paying employment tax creates an uneven playing field. Many, many times the difference between staying viable as a small business owner and closing up shop distills down to the employment tax liability and whether or not that liability can be paid in a timely fashion.

On the other hand if you are running fast and loose with your worker classifications and improperly classify workers as independent contractors when indeed they should be classified as employees the tax ramifications can be devastating for the responsible party. If you mis-classify workers and get audited by the IRS you can be found liable for trust fund employment taxes and the trust fund recovery penalty.  These assessments are not discharged in bankruptcy and can subsequently destroy lives.  I’ve seen it happen on many different occasions. The fallout is tragic particularly when good people are involved.

Now, finally, to provide relief the Internal Revenue Service is offering a new program that will allow many employers the opportunity to resolve past worker classification issues. You apply for the program by filing IRS Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before treating the workers as employees.

Employers accepted into the program will pay an amount approximately equal to just over one percent of the wages paid to the reclassified workers for the past year. No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years. On the down side if it can be called that participating employers will, for the first three years under the program, be subject to a special six-year statute of limitations, rather than the usual three years that generally applies to payroll taxes.

Under this new Voluntary Classification Settlement Program (VCSP), eligible employers can obtain substantial relief from federal payroll taxes they may have owed for the past, if they prospectively treat workers as employees. The VCSP is available to most for profit businesses, tax-exempt organizations and government entities that have up until now improperly classified their workers as independent contractors, and now want to correctly treat these workers as employees. To be eligible employers must:

  • Consistently have treated the workers in the past as non-employees,

  • Have filed all required Forms 1099 for the workers for the previous three years

  • Not currently be under audit by the IRS

  • Not currently be under audit by the Department of Labor or a state agency concerning the classification of these workers

For more information be sure to check out IRS Announcement 2011-64.