Academic journal article Journal of Accountancy

Voluntary Classification Settlement Program

Academic journal article Journal of Accountancy

Voluntary Classification Settlement Program

Article excerpt

Determining proper classification of workers, either as independent contractors or employees, can be a subjective challenge for employers. The determination of whether a worker is an employee or an independent contractor is based on the facts and circumstances surrounding the individual's work for the employer. Generally, the more the employer is able to control and direct the worker, the more likely the worker should be classified as an employee.

Worker classification issues uncovered in an audit can lead to costly assessments of past employment taxes, penalties, and interest for reclassified employees. Nontax exposure, such as reclassified workers' benefit provisions, may also exist. Representatives and practitioners serving taxpayers at risk for worker reclassification should carefully consider the alternatives available to assist taxpayers in becoming compliant. One alternative is the Voluntary Classification Settlement Program (VCSP).


Before the VCSP was established, only taxpayers under audit could resolve worker classification issues and obtain relief from federal employment taxes through the IRS's Classification Settlement Program (CSP). The IRS established the VCSP to allow taxpayers to come into compliance prospectively while obtaining generous relief from liability for past federal employment taxes. In exchange for voluntary compliance and reclassification of workers as employees, the taxpayer receives the following relief:

1. The taxpayer pays 10% of the employment tax liability that would have been due on compensation paid to the workers being reclassified for the most recent tax year (determined under the reduced rates of Sec. 3509(a));

2. The taxpayer is not liable for any interest and penalties on the liability; and

3. …

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