Academic journal article Journal of Accountancy

IRS Offers Employee Reclassification Agreement

Academic journal article Journal of Accountancy

IRS Offers Employee Reclassification Agreement

Article excerpt

Employers may reclassify independent contractors as employees and limit the resulting federal payroll taxes for their most recent tax year, plus avoid related penalties and interest for prior years, under an IRS program announced Sept. 21.

In Announcement 2011-64, the IRS outlined its new Voluntary Classification Settlement Program (VCSP). Unlike an existing settlement program for employers under an IRS examination, the VCSP allows eligible taxpayers to voluntarily enter into an agreement with the IRS.

Generally, if an employer has the right to direct and control how a worker performs services for the employer, that worker is properly classified as an employee and the employer must withhold and remit FICA and income taxes from wages and other compensation and pay the employer's share of FICA tax. Proper classification of workers has been a perennial concern for employers, employees and the government. In 2010, the IRS launched a national research project in which it sent thousands of audit letters to employers. In mid-September 2011, the IRS signed a memorandum of understanding with the U.S. Department of Labor to share information between them to reduce misclassification.

To participate in the VCSP, employers must submit an application and agree to prospectively treat their workers or a class or group of workers as employees for federal employment tax purposes in future tax periods. Employers must also agree to extend the period of limitation on assessment of employment taxes for an additional three years for each of the three calendar years beginning after the date of the agreement. …

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