Posted by The TaxAdvocate Group, LLC

What Is The VCSP (Voluntary Classification Settlement Program)?

What Is The VCSP (Voluntary Classification Settlement Program)?

The VCSP (voluntary classification settlement program) is a program developed by the IRS that allows taxpayers to voluntarily reclassify their employees as employees in future tax periods for labor tax purposes. According to the VCSP, a taxpayer will pay 10% of the amount of payroll tax that would have been due for compensation paid to workers who reclassified in the last fiscal year, calculated using the reduced rates of income from section 3509 (a). Also, the taxpayer will not be liable for interest and payment penalties under the VCSP and will not be audited for previous years' payroll tax purposes with respect to the classification of workers. Taxpayers can apply for the VCSP using Form 8952.


How does VCSP work?

The IRS established the classification settlement program to help employers manage the burden of enforcing labor taxes and deter labor fraud related to the independent contractor's misclassification to avoid paying taxes on the work. Although the program is open to almost all contributing employers, there are certain eligibility requirements. For example, the IRS wants to ensure that no employer in the program is currently doing a tax audit to classify its employees. Once companies have been approved for the program, they must agree to prospectively treat the category or categories of workers as employees for future tax periods.


Should all workers be reclassified as employees?

No. The VCSP allows taxpayers to reclassify some or all of their workers. Nevertheless, once a taxpayer chooses to reclassify some of their workers as employees, all workers in the same category should be treated as employees for payroll tax purposes.

Example: ABC Company is currently hiring painters, electricians, and plumbers to perform on-site services. ABC decides to reclassify its painters as employees voluntarily. ABC submits its applications and is accepted into the VCSP and signs an agreement with the IRS to reclassify painters as future tenure employees. Once the VCSP contract is executed, ABC must treat all painters as employees for labor tax purposes.


Benefits of using the VCSP

When it comes to payroll services, businesses need to ensure that their practices comply with applicable laws and regulations and that the different requirements can seem overwhelming. By including the voluntary IRS worker classification in the resolution program, companies can significantly improve the tax burden associated with their workers' prior misclassification. Acceptance into the program means:

  • Employers pay only 10% of the labor tax payable to workers in the previous fiscal year.

  • The employer's previous financial years are not subject to revision, according to VCSP.

  • There is no interest or fine charge.


Who is eligible for the VCSP?

As you might expect, not all companies automatically qualify for this IRS settlement program. To participate and obtain IRS approval, businesses must meet the following requirements:

  • 1099 Forms completed by each worker in the last three years.

  • Former workers have always been treated as independent contractors or other non-employees.

  • Not be subject to labor tax audits regarding reclassified workers' job classification in previous years' voluntary classification agreement program.

  • There is no current participation in an IRS labor tax audit, and there is no employee classification audit by the Department of Labor or any state government agency.

  • You pay 10% of the payroll tax due to workers' wages paid in the last fiscal year.

  • You will not be responsible for interest and penalties on the amount.


How to Apply for the VCSP

Interested employers who feel they meet the qualification requirements can apply by following the steps below:

  • Use Form 8952, Registration Program for Voluntary Classification Settlement.

  • Employers must register at least 60 days before the date they wish to start treating workers as employees.

  • The applicant can provide contact information for a person who has a valid power of attorney to help with the process, but the candidate must sign Form 8952.

  • If accepted, the VCSP will enter into a conclusion agreement.

In employee management, some of the most important areas to consider are payroll, salary controls, taxes, and other financial items. Entrepreneurs can easily be overwhelmed with the difficult task of complying with applicable laws and regulations; sometimes, errors occur. However, through the VCSP, employers can reduce the tax burden resulting from the misclassification of employees.

Employers are encouraged to seek professional advice when participating. The voluntary classification settlement program is provided only by the IRS, and understanding the agency's guidelines can be confusing. There have been several changes since its inception.


How is the VCSP payment amount calculated?

The VCSP payment is 10 percent of the amount of payroll tax calculated at the reduced rates under Section 3509 (a) of the Internal Revenue Code for compensation paid during the fiscal year on most recent to workers reclassified under the VCSP. According to Article 3509 (a), the effective tax rate for compensation up to the Social Security wage base is generally 10.68%. The effective rate of remuneration above the pension salary is 3.24%.

The amount due in the VCSP is calculated based on the remuneration paid during the last closed financial year, calculated at the time of the VCSP request filing. Thus, for example, the effective rate of 10.68% applies to VCSP requests submitted in 2021, the last financial year ending being 2020. The rate of 3.24% applies to remuneration above the salary base of the business.


Example: The facts are the same as in the previous example, except that some of the workers identified in the VCSP application were paid out of the Social Security base salary of $250,000. According to Section 3509 (a), the payroll taxes applicable to $ 1,250,000 would be $ 133,500 (10.68% of $ 1,250,000) and the applicable payroll taxes of the remaining $250,000 would be of $ 8,100 (3.24%) versus $ 250,000. According to VCSP, your earnings would be 10% of $ 141,600 ($ 133,500 plus $ 8,100) or $ 14,160.


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