In some cases, employers who hire workers may find that their employees actually meet the standards for independent contractors. If this is the case, these business owners may be submitting payroll taxes on their employees' income when it is not legally required. The good news is that the IRS now allows these employers to change the status of their workers for tax purposes if they meet certain conditions. The arrangement for this change is called the Voluntary Classification Settlement Program (VCSP). 

What is the Voluntary Classification Settlement Program?

In short, the VCSP makes it possible for employers to update the status of their hired workers, changing them from employees to independent contractors. This is a significant adjustment, because the IRS rules for employers regarding these two classifications are very different. When a business hires employees, the IRS requires that the owner withhold payroll taxes from the employees' income, including Social Security and Medicare (FICA) taxes. In addition, the business owner is required to match these taxes with an equal portion of his or her own, submitting both parts to the IRS every quarter.

Independent contractors, though, are considered as self-employed individuals for tax purposes and are required to submit payroll taxes to the IRS. This eliminates the employers' responsibility to withhold payroll taxes and match their contributions. While an employer is required to submit a Form W-2 at year's end for each employee, he or she is only required to submit a Form 1099 to an independent contractor.

Benefits of the VCSP

By allowing employers to reclassify their qualifying workers as independent contractors, the IRS gives employers the chance to reduce business taxes for hiring independent contractors by removing the requirement to pay income taxes. In most cases, employers are also not required to provide health insurance or retirement plan benefits to independent contractors, which could save them even more in business costs.

Qualifying for the VCSP

To become eligible for the VCSP, employers must have been legally treating their employees as independent contractors for a period of at least three years prior to program application. This would include issuing Form 1099 for work done, rather than Form W-2, and allowing workers to dictate both the time of their hours worked and the setting.

Those who meet these standards can apply for the program by completing Form 8952 "Application for Voluntary Classification Settlement Program" and an accompanying Form 2848 indicating power of attorney privileges for a selected individual. The IRS recommends that employers who wish to apply for the VCSP do so at least 60 days before they want to begin receiving benefits under the program.

Qualifying employers who are eligible for benefits under the Voluntary Classification Settlement Program may be able to save a considerable amount on their annual tax liability. The key to receiving these benefits is learning about the eligibility requirements and then meeting them consistently before applying.