A new IRS program focuses on getting companies to voluntarily reclassify independent contractors as employees. Meanwhile, the U.S. Department of Labor is joining with the IRS and a number of states to improve efforts at ending misclassification.

The “Voluntary Classification Settlement Program” from the IRS, announced Sept. 21, aims to allow companies to voluntarily reclassify independent contractors as employees and face only limited tax liability.

To be eligible, a company: 

• Must have consistently been treating the workers as independent contractors
• Must have filed all required 1099 forms for the workers for the previous three years.
• Cannot currently be under audit by the IRS.
• Cannot currently be under audit concerning the classification of workers by the Department of Labor or by a state agency.

Participating firms will pay 10 percent of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year; will not be liable for any interest and penalties on the liability; and will not be subject to an employment tax audit with respect to the workers for prior years.

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Separately, the U.S. Department of Labor announced the signing of a memorandum of understanding last week between it, seven states and the IRS in order to improve coordination on employee misclassification compliance. Those states are Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah and Washington.

In addition, the Department of Labor’s Wage and Hour Division announced agreements to enter into memorandums of understanding with the state labor agencies of Hawaii, Illinois and Montana as well as New York’s attorney general.

“We’re standing united to end the practice of misclassifying employees,” said Secretary of Labor Hilda Solis. “We are taking important steps toward making sure that the American dream is still available for all employees and responsible employers alike.”