VCSP to the rescue for your misclassified workers

misclassified worker

Let’s assume your business is growing. Over the two years, you hired a few extra people to sustain you during the busy seasons. However, the busy seasons never really ended and those few extra people have become a necessary part of your business operation. When you hired them thinking it would be a temporary solution, you hired them as independent contractors. But, they still remain on your books contractors but they are looking more and more like employees these days. Are they misclassified workers and what can you do about it now?

Luckily for you, the IRS has a forgiveness plan for misclassified workers called “Voluntary Classification Settlement Program (VCSP)”. If you voluntarily come forward with the misclassification error, the IRS forgives a big chunk of your past federal employment taxes. You’ll pay only 10% of the most current year’s employment taxes with no interest and penalties. It’s a sweet deal when you see the math behind it.

Misclassified Workers: How to qualify for VCSP

To qualify for VCSP, you must currently treat your misclassified workers as independent contractors, not employees. Plus, you must have already filed your 1099s for those employees-to-be for 3 calendar year before you can get this pardon.

What does VCSP do for you?

Now that your VCSP has been filed:

  • Your class of workers will be employees for future tax periods.
  • You must pay a 10% of the employee tax you would have owed for the most recent tax year if your independent contractor had been an employee.
  • There’s no interest or penalty fees.
  • You have protection from employment classification tax audits for earlier years for you class of workers.
  • It’s a sense of relief! You get federal employment tax certainty & peace of mind.

Let’s put this into real world application. Let’s say you own a flower shop and you’re reclassifying your one floral assistant as an employee in 2017. You’ve paid them $25,000 annually since 2013 when they first came to work for you. If the employment tax rate is 10.28% ($2570), you would have paid out $2570 x 3 years = $7710 in federal employment taxes. However, under the VCSP, you can reclassify them and only pay in 10% of what you would have owed in 2016 ($257) if they were classified correctly. No back-pay for federal employment taxes. Zero penalties. Zip interest on past due amounts. No IRS audit for earlier year’s payroll taxes.

tax preparation CPA Woodstock GAThere will be some future adjustments that will affect your bottom line once you use the VCSP. You’ll be subject to minimum wage requirements and overtime laws. But, in the end, VCSP can come to your rescue if you think you’ve made an error somewhere in your business’ history. If you think you’ve made an error, let’s sit down and discuss your year end tax preparation.