On September 21, 2011, the Internal Revenue Service (“IRS”) announced a new program that will give businesses the opportunity to resolve prior worker classification issues by voluntarily reclassifying their non-employee workers (such as consultants, freelancers, and independent contractors) as employees for federal employment tax purposes. Officially called the “Voluntary Classification Settlement Program” (“VCSP”), this program is part of a larger “Fresh Start” initiative at the IRS to aid taxpayers and businesses in addressing their federal tax liabilities.

As you are likely aware, for federal tax purposes, payments to employees are subject to income tax and employment tax withholding, while payments to independent contractors are not. Distinguishing employees from independent contractors can be challenging, and misclassifications can lead to IRS audits, among other things, which often result in determinations requiring the payment of back taxes, interest, and penalties.