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September 28, 2011

Weekly Wednesday Acronym: Correcting Misclassifications through the VCSP – What’s this all About?

Independent contractor or employee.  It is a decision that many employers have to make when setting up new hires.  Sometimes it is a fine line to determine which side of the fence your “worker” is on, and there are certainly financial benefits of classifying workers as independent contractors.

Evidently the IRS believes this is a widespread problem and last week announced a new “Voluntary Classification Settlement Program” (VCSP).  As defined by the IRS:

“The VCSP is a new program developed by the IRS that allows taxpayers to voluntarily reclassify their workers as employees for future tax periods for employment tax purposes. Under the VCSP, a taxpayer will pay 10 percent of the amount of employment taxes calculated under the reduced rates of section 3509(a) of the Internal Revenue Code for the compensation paid for the most recent tax year to the workers being reclassified under the VCSP. In addition, the taxpayer will not be liable for any interest and penalties on the payment under the VCSP, and will not be audited for employment tax purposes for prior years with respect to the worker classification of the workers. “

If that sounds like a good deal, hold on.  Some analysts believe there are many other factors which should be considered before signing up for the VCSP.  According to Steven Dunn, Contributor for Forbes, “Employers should avoid the program, as the relief promised by it is illusory.”  One factor to consider is that an employer who participates in the VCSP agree to extending by three years the period of limitations on assessment of employment taxes for the first three calendar years.  This begins after the date as of which workers were treated as employees.

Additionally, although this is to be treated confidential, if the information becomes public does that open the door for a wage hour class action?  After all, by participating in the VCSP, the employer is “admitting” to misclassifying workers.

Another item to be considered is that the VCSP is aimed at employment tax compliance.  This does not relieve any non-compliance or liability under state tax laws, workers’ compensation laws, federal or state wage and hour laws, ERISA, or other employment laws.  These are other areas that may need to be addressed, after dealing with the IRS through the VCSP program.

So is this a bad program?  No.  In some cases, this may provide some relief for inadvertent misclassifications and allow a fresh start.  Best practice is to properly classify employees from the get-go and eliminate the need for “clean-up” as much as possible.  What do you think?

Sources: 

IRS:  http://www.irs.gov/businesses/small/article/0,,id=246014,00.html

Form 8952:  http://www.irs.gov/formspubs/article/0,,id=242970,00.html

Steven Dunn, Forbes:  http://www.forbes.com/sites/stephendunn/2011/09/27/employers-beware-of-irs-illusory-worker-classification-program/

Fact Sheet IRS – Employment Taxes and Classifying Workers:  http://www.irs.gov/newsroom/article/0,,id=177092,00.html

Fact Sheet DOL – Employment Relationship Under the Fair Labor Standards Act: http://www.dol.gov/whd/regs/compliance/whdfs13.pdf

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