Employment Law and Selective Service Blog


IRS Creates Incentive to Fix Worker Classification Errors

Posted by Marc Smith | Oct 19, 2011 | 0 Comments

As we have written elsewhere in this blog, when an employer misclassifies a worker as an independent contractor, the employer exposes itself to a host of potential claims and liabilities, including but not limited to  payroll taxes, income tax withholding, workers compensation, unemployment insurance, overtime pay, and benefits.

To encourage employers to voluntarily fix worker classification errors, the IRS has created a new program known as the Voluntary Classification Settlement Program (“VCSP”) pursuant to which eligible employers can significantly decrease their exposure as a result of misclassifying employees as independent contractors.

With the creation of the VCSP, employers that use independent contractors should re-evaluate their independent contractor relationships and confirm whether the facts support the independent contractor label.  If an eligible employer determines that one or more independent contractors should have been classified as employees, it may apply for relief under the VCSP.

An employer participating under the VCSP: (i) agrees to prospectively treat a class of workers as employees; and (ii) pays to the IRS an amount equal to 10% of the employment tax liability that would have been due on compensation paid to the misclassified workers for the most recent tax year and will not be liable for any interest or penalties.  In exchange, the employer becomes exempt from an employment tax audit with respect to the worker classification for the group of workers reclassified under the VCSP.

While the relief offered under the VCSP is potentially significant, employers must keep in mind that the VCSP provides relief only from federal payroll tax liabilities. The program does not reduce the exposure relating to other potential claims and liabilities, such as state taxes, workers compensation, overtime pay, and benefits.  Accordingly, employers should ensure that they understand and weigh both the benefits and the potential risks of participating in the program.  For more about the program, the IRS website contains useful information.

About the Author

Marc Smith

Marc J. Smith is a Rockville, Maryland employment attorney and a founding member of the law firm formerly known as Smith, Lease & Goldstein, LLC. In 2018, after 18 years managing Smith, Lease & Goldstein, LLC's employment counseling and litigation practice, Marc launched his own boutique practice...


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Representation Of Employers And Employees

The Law Office of Marc J. Smith, LLC is a boutique employment law practice based in downtown Rockville, Maryland near the Montgomery County Circuit and District Courts. The Firm’s practice focuses exclusively in the employment law arena and provides counseling, litigation and a wide range of other employment-related services to employers and employees throughout the State of Maryland, Washington D.C. and other jurisdictions. The Firm also represents individuals who have failed to register with the Selective Service System and who are trying to apply for or maintain federal employment.