Payroll CPA discusses IRS Form 8952 | Voluntary Classification Settlement Program (VCSP) | Payroll Taxes

I’ll present an IRS Form 8952 calculation example. But first, let’s look at the core issue of the Voluntary Classification Settlement Program (VCSP). Here’s our prior post on Form 8952. It covers the qualifications and known implications of VCSP.

What is VCSP?

A new voluntary IRS program offering tax relief and criminal amnesty for companies that paid workers as subcontractors, instead of as employees.

The Main Payroll Tax Issue

The IRS requires you to pay employees as employees. Which means your business pays employment and unemployment taxes, over and above the gross wages. Ouch! So, perhaps you classified true employees as subcontractors and inadvertently circumvented the associated expenses and red tape.

For IRS Form 8952, who is an Employee?

This post isn’t definitive on the subject. Any payroll CPA can help you with specifics. But even the IRS goes on a case by case basis, taking into account multiple factors. Generally speaking, if you can tell a worker what to do and when to do it, they’re an employee.

Why is the IRS offering Form 8952 - Voluntary Classification Settlement Program (VCSP)?

• Full back payroll tax compliance could bankrupt some companies.
• The IRS incurs large administration costs to enforce back payroll tax compliance.
• They seem to think that once you submit Form 8952, future compliance is assured. Or perhaps, they have more aggressive techniques to prosecute backsliders.
• The IRS had good success with its voluntary foreign banking disclosure programs.

Can the IRS really Catch Companies Paying Employees as Subcontractors?

In my opinion, absolutely. No problem what so ever. My perception? They don’t have the resources to take action on all known violators.

Cheaters Prosper?

In this case, perhaps. The entire Form 8952 payment is only 10% of what the last year’s payroll taxes would have been. Normally the IRS could go back multiple years and demand all back taxes, plus interest, plus penalties.

When is IRS Form 8952 due?

60 days before you want to re-classify your subcontractors. So, you could file today. But their instructions specifically illustrate this could be August 1, 2012. Which seems to encourage companies to wait on compliance until October 2012?

Line by Line Payment Calculation Example for IRS Form 8952

Let’s say you want to hold off until the last known deadline. Please review your company’s options with a payroll CPA. Your wage base typically is last calendar year. There could be advantages to file now and thus use 2010 as the calculation’s wage base. So, anyway, you file Form 8952 on August 1, 2012. You paid $100,000 to subcontractors, the workers you’re now re-classifying as employees, during 2011. Let’s assume your company qualifies for VCSP. Note this example implicitly uses workers who earned less than the $106,800 Social Security wage cap for 2011.

• $100,000 x 10.28% = $10,280. For the Social Security portion of employment tax.
• $100,000 x 3.24% = $3,240. For the Medicare portion of employment tax
• $10,280 + $3,240 = $13,520. This is the total of employment taxes that would have been due for 2011, had you classified your workers correctly.
• 10% x $13,520 = $1,352 due with Form 8952 submission.

Your company saved 90% of the 2011 payroll taxes, and, all payroll taxes on prior years.

We’re a Wilmington NC CPA firm that offer payroll services to wide geographical base thanks to our virtual office. We expect to prepare Form 8952s. If you’d like a free initial phone consult, please call us at (910) 399-2705.