Olly olly oxen free!
Do you remember this chant as the “all clear” signal when playing tag, hide-and-seek, and similar childhood games? (In case you’re wondering, linguists think the phrase probably evolved from “all ye, all ye, ‘outs’ in free” as it was passed down over generations of schoolchildren.)
On September 21, the Internal Revenue Service announced the Voluntary Classification Settlement Program (VCSP). It’s sort of like an “olly olly oxen free” for employers who have misclassified employees as independent contractors. Sort of. It’s not entirely free, of course. But the program does offer employers substantial relief from past federal employment tax liability if they agree to get into compliance going forward.
The VCSP is available to employers who are currently treating a class or group of workers as independent contractors, but want to treat the workers as employees prospectively. In exchange for agreeing to treat the workers as employees for future tax periods, employers participating in the VCSP get the following relief:
- pay only 10 percent of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year;
- no liability for any interest and penalties on the amount; and
- not subject to an employment tax audit with respect to the worker classification of the workers being reclassified under the VCSP for prior years.
To participate in the VCSP, a taxpayer must apply by using IRS Form 8952. Eligible taxpayers accepted into the VCSP must also enter into a closing agreement with the IRS to finalize the terms of the VCSP, and simultaneously make full and complete payment of any amount due under the closing agreement.
In short, the VCSP provides an opportunity for employers with possible misclassifcation problems to "come clean" with minimal back tax liablity. But employee misclassifcation may also present challenges, and potential liability, under wage-and-hour laws and employee benefit plans. Employers who think they might benefit from the new IRS program should consult with experienced tax and employment law counsel to evaluate the situation and chart the best course of action based on all the facts and circumstances. You don’t want to turn your game of hide-and-seek into a game of cops and robbers.
If you would like help assessing whether the VCSP makes sense for your company, contact Boyd
See our prior blog posts about employee misclassifcation issues: