The issue of who is an employee and who is an independent contractor continues to challenge businesses, the IRS and the courts.

Now the IRS has launched a new program that will enable many employers to resolve past worker classification issues and achieve certainty under the tax law at a low cost by voluntarily reclassifying their workers.

This new program will allow employers the opportunity to come into compliance by making a minimal payment covering past payroll tax obligations rather than waiting for an IRS audit.

The new Voluntary Classification Settlement Program (VCSP) is designed to increase tax compliance and reduce burdens for employers by providing greater certainty for employers, workers and the government. Under the program, eligible employers can obtain substantial relief from federal payroll taxes they may owe if they prospectively treat workers as employees.

The VCSP is available to many businesses, tax-exempt organizations and government entities that currently erroneously treat their workers or a class or group of workers as nonemployees or independent contractors and now want to correctly treat these workers as employees.

To be eligible, an applicant must:

• Consistently have treated the workers in the past as nonemployees
• Have filed all required Forms 1099 for the workers for the previous three years
• Not currently be under audit by the IRS, the Department of Labor or a state agency concerning the classification of these workers

Interested employers can apply for the program by filing Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before they want to begin treating the workers as employees.

Employers accepted into the program will pay an amount roughly equal to 10 percent of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year. No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years. Participating employers will, for the first three years under the program, be subject to a special six-year statute of limitations rather than the usual three years that generally applies to payroll taxes.

Full details, including FAQs, are available here and in Announcement 2011-64.