How about a “Fresh Start” under the VCSP? | DCR Workforce Blog

How about a “Fresh Start” under the VCSP?

The IRS has just come up with the Voluntary Classification Settlement Program (VCSP) for all those employers who may not have classified independent contractors in a proper manner (either due to a lack of internal processes or because of the resistance of the contractors themselves to produce the necessary paperwork to justify such classification). There may also be cases where employers were misled by existing industry practices or were just trying to save a few bucks. In every case, big or small, the DOL’s “We Can Help” program (which is a part of its ‘Misclassification Initiative’) could invite an audit through any of your own independent contractors voicing a query.

To evaluate this issue – and decide whether it is much safer to take the IRS up on its offer, taxpayers could initiate an immediate internal audit, keeping these points in mind:

  1. Do we have processes in place to ensure that the facts and circumstances of independent contractor employment can pass the common law test to clearly demarcate the de-facto employer?
  2. Do we have diligent and reliable process for classifying independent contractors in place?
  3. Do we assign clear cut responsibilities to the players ensure that for every new classification being made, the process is followed in all its detail without fail?
  4. Is the task of such classification handled by a single person/team or is it spread across all the different teams which have authorization to hire new talent?
  5. Is there any possibility of the system being by-passed when sourcing a new contractor out of a lack of knowledge/reluctance on the part of the contractor to meet the requirements/negligence?
  6. Is there an internal training program to ensure that all the important players have a thorough knowledge of the ways to mitigate risk from the mis-classification?
  7. Is there complete visibility into the details of all the cases where the contractors were classified as ICs?
  8. Is the paperwork in order for every single one of them?

An assessment on these lines (and others, depending upon the unique needs of the business processes in place) could turn up data which may be a cause for concern. The ensuing cost vs. benefit analysis can evaluate the cost of facing a possible audit and inviting exposure or plugging the leak by taking up this offer for voluntary re-classification and accepting the limited federal employment liability for past non-employee treatment.

If you do want to take it up, the next step would be to assess yourself on the eligibility norms stipulated by the IRS which need to be met before closing the agreement and obtaining the relief.
Voluntary CSP:

The Voluntary Classification Settlement Program permits reclassification of workers as employees with reduced federal employment tax liabilities for past misclassifications. By resolving worker classification issues fairly early in the process, both the government and the tax payer will benefit equally by saving on incurring arduous procedures to correct and penalize transgressions.

Under this program, employers who currently treat a class or group of workers as independent contractors/non-employees and wish to convert them to regular employment are eligible provided they fulfill the following criteria:

  1. The workers must have been consistently treated as non-employees and the employer must have filed all required forms of 1099 for the workers for the previous 3 years.
  2. No IRS/Department of Labor audit of the employer should already be underway.
  3. The employer should not currently be under a state government investigation.
  4. The employer should be in compliance with all audits conducted earlier related to the classification of the workers.

The employer’s liability under the program is limited to the payment of 10 per cent of the notional tax that would have been due on (or approximately 1% of) the total compensation paid to the misclassified workers for the most recent tax year (under the reduced rates of Sec 3509 of the IRS act) – without any interest or penalty, and an assurance that no retrospective employment tax audit will be conducted subsequently. The taxpayer under the program has to agree to extend the period of limitations on assessing employment taxes for six instead of three calendar years subsequent to the date on which the employer agrees to begin treating the workers as employees under the program.

The content on this blog is for informational purposes only and cannot be construed as specific legal advice or as a substitute for competent legal advice. They reflect the opinions of DCR Workforce and may not reflect the opinions of any individual attorney. Do contact an attorney for advice specific to your issue or problem.
Lalita is a people/project manager with extensive experience in operations, HCM and training and development across industries like banking, education, business consulting, BPO and information technology. She believes in a dynamic approach to life and learning as change is the only constant.