What Is the VCSP and How Does It Work for Employers?
Learn how the VCSP helps employers reclassify workers as employees with reduced penalties and simplified compliance requirements.
The Voluntary Classification Settlement Program (VCSP) offers employers a way to correct worker misclassification while reducing tax liabilities and penalties. Misclassifying employees as independent contractors can lead to significant financial consequences, making this IRS initiative a valuable option for businesses seeking compliance.
Program Eligibility
To qualify, businesses must have consistently classified the affected workers as independent contractors, meaning they were never reported as employees on prior tax returns such as Form 941. Employers must also have filed all required Forms 1099-NEC for these workers, documenting compensation. Failure to submit these forms may result in disqualification.
Businesses under audit for worker classification issues—by the IRS, Department of Labor, or state agencies—are ineligible. However, those previously audited and found compliant with past determinations may still qualify if they are not currently under review.
Application Filing Steps
Employers must submit Form 8952, Application for Voluntary Classification Settlement Program (VCSP), providing details about their business, the workers being reclassified, and prior tax reporting practices. Accuracy is crucial, as errors can delay approval.
The form must be filed at least 60 days before reclassifying workers as employees. If approved, the IRS provides instructions for calculating and paying the settlement amount, based on a percentage of employment taxes from prior years under Internal Revenue Code Section 3509.
The IRS may request additional details before granting approval. If accepted, the employer signs a closing agreement, formalizing the reclassification terms and reduced tax liability. This agreement requires compliance with future payroll tax obligations, including withholding and reporting under Internal Revenue Code Section 3402.
Settlement Terms
Employers approved for the VCSP pay only 10% of the employment tax liability for the most recent tax year, calculated using the lower rates under Internal Revenue Code Section 3509(a), which applies to unintentional misclassification. No interest or penalties are added.
The IRS will not seek additional payroll taxes for prior years related to the reclassified workers, but this protection does not extend to other federal or state agencies. Employers may still need to address classification issues under state labor laws or unemployment insurance rules.
Businesses must also agree to a three-year compliance monitoring period, during which the IRS may review payroll tax filings to ensure continued adherence to worker classification rules.