In prior posts, we explained the consequences of incorrectly classifying workers as independent contractors or employees “ a top compliance issue for nonprofit organizations.
Many small business owners worry they may have misclassified workers as contractors. This mistake can trigger big bills for employment taxes and a scary employment tax audit. You want clear steps to fix the problem without surprise penalties.
The IRS opened a temporary voluntary classification settlement program, the VCSP, to help. Employers can file Form 8952 to apply and may pay just 25 percent of the employment tax liability for the most recent year.
This post will explain who can apply, how to file Form 8952, and what to do about late 1099 forms and your EIN.
Key Takeaways
- IRS expanded VCSP lets employers apply with Form 8952 to reclassify workers, pay 25% of tax for prior year, and have no penalties or interest.
- Employers must file Form 8952 by June 30, 2013 and submit applications at least 60 days before their intended reclassification date.
- Eligibility includes employers who failed to file required Forms 1099 for the past three years and affiliated group members under modified VCSP rules.
- Applicants must file missing Forms 1099 for three years, treat all similar workers as employees going forward, and sign Form 8952.
Overview of the IRS Voluntary Classification Settlement Program Expansion
The IRS expanded the voluntary classification settlement program (VCSP) to help more employers and affiliated groups fix worker classification and cut audit risk. You can apply with Form 8952 and pay via the Electronic Federal Tax Payment System (EFTPS), and the change touches Form W-2, Form 1099, and Form 1040 reporting while aligning with Department of Labor guidance.
Expanded Eligibility Details
Eligibility now covers employers who failed to meet strict forms 1099 filing rules for the past three years. Businesses qualify even if they never filed Form 1099 for the misclassified workers.
Affiliated group members may apply under the modified VCSP for their workforce. All other workers in the same classification must become employees going forward and receive form W-2 treatment, not form 1099.
Organizations can correct employee classification issues to comply with the Internal Revenue Code and Section 3509 guidance.
Applicants should know the program works with tools like EFTPS and Form 8952 filings and that employers must supply an employer ID number and relevant wage records tied to form 1040 reporting for affected workers.
Participation can affect eligibility requirements for EITC, child tax credit, and IP PIN handling for taxpayers. Legal advisers have commented on links to Announcement 2012-45 and Announcement 2011-64, and the U.S. Department of Labor may coordinate on employee classification matters, so read the requirements before applying; next we cover enhancements to benefits.
Enhancements to Benefits
The IRS reduced employer liability to 25% of employment tax for the most recent tax year, down from 100%. That cut yields an effective payment of just over 1% of the wages paid to reclassified workers for the past year.
Participants owe no interest or penalties. The change takes effect under the expanded VCSP and applies to employers who file the Form 8952 application.
This change gives employers greater certainty about worker classification under the expanded VCSP. The program ties to announcements 2012-45 and announcements 2012-46 and intersects common tools like form W-9, form W-4, earned income credit rules, identity protection PIN procedures, and Circular 230 guidance.
See the updated requirements next for filing steps and timelines.
Updated Requirements
Applicants must agree to treat workers as employees going forward. Employers in the United States must file Form 1099 for every misclassified worker for the last three years. The application must include the worksheet from Announcement 2012-46 and Form 8952.
A graduated penalty applies based on the number of unfiled 1099s over those three years, with a cap set by IRS rules. VCSP applicants must meet these updated requirements before the agency will approve a settlement.
Current Status of the Program
The VCSP expansion runs as a temporary initiative to encourage compliance. Employers must file Form 8952 by June 30, 2013 to apply.
You must submit the application at least 60 days before the desired start date for treating misclassified workers as employees. Time limits on the program make quick action essential, and the IRS advises employers to consult a tax attorney or CPA because the filing window is narrow.
Detailed Examination of the VCSP Expansion
I explain the VCSP expansion, who now qualifies, the gains offered, the Form 8952 steps, and how IRS e-services and audit teams will review claims; read more.
Criteria for Expanded Eligibility
The VCSP expansion lets more employers apply. The IRS now allows businesses that did not file all required 1099 forms for the past three years to join. Employers who previously would have been disqualified may now qualify.
Only firms that agree to prospective reclassification of workers can take part.
Applicants must use updated forms and worksheets specified by the IRS. Use Form 8952 to start the process. The IRS will review the updated paperwork and the agreed-upon reclassification plan.
The agency will approve or deny based on those documents and the program rules.
Comprehensive Benefits Offered
IRS offers a temporary expansion that cuts employer costs to 25% of the employment tax liability for reclassified workers’ compensation for the most recent tax year. That payment usually equals just over 1% of wages paid in the past year.
No interest or penalties apply to the settlement.
Employers gain protection from employment tax audits for prior years tied to the affected worker classifications. They file Form 8952 to request the settlement agreement and arrange the reduced payment with the IRS.
IRS reviews the submission and issues the final agreement.
Essential Requirements for Participation
After outlining the benefits, know the steps you must meet to join the VCSP. Employers must file all unfiled Form 1099s for the last three years and give each worker a copy. A graduated penalty applies by number of unfiled Form 1099s, and the IRS caps the total penalty.
All similarly classified workers must be treated as employees going forward.
Applicants must sign Form 8952 and submit it with required documents to IRS.gov. They must agree to treat affected workers as employees in future tax periods and update payroll systems and tax software.
Tax preparers or payroll vendors can help calculate penalties and prepare filings.
Program Operational Status
Following the essential requirements, review how the program operates. The expanded VCSP runs as a temporary offering with a strict application deadline of June 30, 2013. Filers must submit applications at least 60 days before their intended reclassification date.
The IRS reviews each submission upon receipt and determines eligibility.
Approved participants sign a closing agreement with the IRS to finalize terms. Businesses use Form 8952 to apply and then wait for IRS review and approval.
Steps for Applying to the VCSP
You start by completing the application form (Form 8952) and collecting payroll records and proof of independent worker status. Send the packet to the Internal Revenue Service VCSP unit and await review of your settlement request.
How to Submit Form 8952
Complete Form 8952, the required application for Voluntary Classification Settlement Program participation. Attach the worksheet from Announcement 2012-46 to the application.
File the package at least 60 days before the desired reclassification effective date. Gather all supporting documents and any late-filed Forms 1099, and prepare them for electronic filing through the IRS e-file system.
Process for Review and Approval
After you submit Form 8952, the IRS begins its review and approval process. A revenue agent or exam team scans the form and the accompanying worksheet for completeness and needed signatures.
IRS staff assess eligibility under the expanded VCSP criteria. The agency then calculates the payment amount and any applicable penalties from the application details. Finally, the IRS communicates the approval status to the applicant by mail or Secure Access secure message.
Finalizing the Agreement and Arranging Payment
The IRS sends a closing agreement to approved employers. The closing agreement outlines the payment terms and the obligations for prospective compliance. The closing agreement also references the original Form 8952 submission.
Employers must sign and return the closing agreement to the IRS to accept the settlement.
IRS staff then arranges payment of the agreed settlement amount and any capped penalties. The agency will set timelines and methods for payment in the closing agreement, and employers must follow those terms.
Additional IRS Support Measures for Workers
The IRS now offers reporting relief for tips and overtime, updates on Form 941 and payroll tax rules, and clearer treatment for Social Security and Medicare under the expanded VCSP—read more.
Reporting Relief for Qualified Tips and Overtime
Relief for 2025 includes penalty waivers for information reporting of qualified tips and overtime compensation under the No Tax on Tips/Overtime laws in the OBBBA.
Agency guidance outlined these reporting relief provisions for the 2025 tax year and directs taxpayers to IRS.gov and Tax Notes for details.
Related Post: Now is The Time to Review the Worker Classification
Conclusion
The article recapped the IRS Voluntary Classification Settlement Program expansion and the main steps employers must follow. It showed new eligibility, a reduced 25 per cent tax charge for the most recent year, and no interest or penalties for firms that file Form 8952 by June 30, 2013.
You can file Form 8952, submit late 1099s for the past three years, and pay roughly one percent of wages for the reclassified workers. Ask your tax adviser, consult IRS.gov, or use payroll software to prepare the paperwork and avoid prior-year employment tax audits.
Take action now, reclassify workers where due, and protect your business while you reduce future tax risk.
FAQs
1. What is the IRS Temporary Expanded Settlement Program for Workers?
The IRS created this program to help workers settle some unpaid tax bills. It offers a temporary path to lower balances, and it aims to give fast relief to workers who qualify.
2. Who can use the program?
Workers who owe back taxes and meet IRS rules may apply. The program covers many employees and other taxpayers with employment tax issues. Check IRS guidance to confirm eligibility.
3. How do workers apply and is there a deadline?
Workers must follow IRS directions, submit required forms, and send proof of income and expenses. The IRS sets the deadline, so check the official IRS notice and act soon.
4. Will this program fix my tax problem, and should I get help?
The program can reduce what you owe, but it may not erase all penalties. Many workers hire a tax professional to prepare their case. I once watched a friend save time and stress by getting expert help, and the result was smoother.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. Ellis advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations. Ellis is licensed to practice in Washington and Arizona and advises nonprofits on federal tax and fundraising regulations nationwide. Ellis also advises donors with regard to major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.