The IRS recently modified and expanded the Voluntary Classification Settlement Program (VCSP), which allows employers to achieve legal certainty by reclassifying independent contractors as employees for future tax periods. Until June 30, 2013, the IRS is waiving the program eligibility requirement that an employer must have filed 1099 forms for the past three years with respect to workers they are seeking to reclassify. An employer who has misclassified workers as independent contractors should seriously consider making a correction under this expanded program.

The standard VCSP is available to employers who have consistently treated the workers in the past as nonemployees and who have generally filed all Forms 1099 for those workers for the past three years. To participate in the program, employers must complete an application on Form 8952 and pay 10 percent of the federal employment tax liability that would have been due on the compensation paid to the workers for the most recent tax year, determined under reduced rates provided by the program. In return, the employer is not liable for any interest or penalties, and is not subject to audit on federal payroll taxes related to these workers for prior years.

Under the expanded program, employers under IRS audit (other than an employment tax audit) also now qualify for the VCSP. Employers allowed into the program are no longer subject to the special six-year statute of limitations, instead of the usual three-year limitation period that normally applies to payroll taxes. Finally, until June 30, 2013, the IRS is waiving the Form 1099 requirement for the reclassified workers. If an employer corrects under this temporary expansion period, the employer is required to pay 25 percent of the federal employment tax liability that would have been due on the compensation paid to the workers for the most recent tax year, plus reduced penalties for unfiled Forms 1099. The employer will not be liable for other interest or penalties, and is not subject to audit on federal payroll taxes related to these workers for prior years.