ASL: How to Voluntarily Correct the Classification of Your Workers

Misclassifying workers as independent contractors instead of employees can create federal tax and wage-and-hour exposure. The good news is that U.S. employers may be able to correct worker classification voluntarily—especially for federal employment tax purposes—using official IRS pathways.

Why worker classification matters

Worker classification affects payroll tax withholding, reporting, and compliance. For federal tax purposes, the IRS explains the difference between employees and independent contractors in its guidance on worker classification (employee vs. independent contractor).

For wage and hour purposes under the Fair Labor Standards Act (FLSA), the U.S. Department of Labor (DOL) addresses worker misclassification and related enforcement on its misclassification under the FLSA resource page.

Federal standards: IRS vs. DOL (FLSA)

The IRS and the DOL do not use identical tests, but both focus on the actual facts of the working relationship rather than labels in a contract. The DOL provides rulemaking materials and updates related to employee vs. independent contractor status under the FLSA on its FLSA independent contractor rulemaking page.

Voluntary correction option: IRS Voluntary Classification Settlement Program (VCSP)

The primary federal program for voluntarily correcting worker classification for employment tax purposes is the IRS Voluntary Classification Settlement Program (VCSP).
VCSP generally allows eligible employers to prospectively treat workers (or a class of workers) as employees and receive partial relief from federal employment taxes.

Eligibility (high level)

VCSP eligibility depends on meeting IRS requirements, including consistent prior treatment of the workers as nonemployees and certain filing conditions. The IRS explains the program requirements and process on its official VCSP page and related materials.

How to apply

To apply, employers submit
Form 8952 (Application for Voluntary Classification Settlement Program).
The IRS also publishes official instructions for Form 8952 describing how the application works and what information is required.

Important limitations to understand

VCSP is focused on federal employment tax treatment. It does not automatically resolve other legal obligations, such as wage-and-hour issues under the FLSA or state-level requirements. Employers should evaluate federal and state compliance separately.

Practical steps before you correct classification

• Review how each worker actually performs services (duties, supervision, scheduling, tools/equipment, and payment method).
• Confirm what documentation exists (contracts, invoices, timesheets, project communications).
• Check your prior reporting (for example, whether Forms 1099 were filed when required).
• Consider whether the facts suggest employee treatment under federal standards and whether VCSP may be appropriate.

Official sources

• IRS: Worker Classification 101 (Employee or Independent Contractor)
• IRS: Voluntary Classification Settlement Program (VCSP)
• IRS: About Form 8952 (VCSP Application)
• IRS: Instructions for Form 8952
• DOL: Misclassification under the FLSA
• DOL: FLSA Independent Contractor Rulemaking

Disclaimer

This article is for general informational purposes only and is not intended as tax or legal advice. Worker classification is fact-specific and requirements may change. Consult official IRS and DOL guidance or a qualified professional for your situation.

Related AccountingPortal guides

• If your business works with non-U.S. companies, see
  Form W-8 for Foreign Entities (Non-U.S. Companies – Corporation, Active NFFE).
• For U.S. business classification context, see
  NAICS Codes – North American Industry Classification System (NAICS).

M. Spik

Editor
25 years of experience managing tax, accounting, payroll, and employment-related information portals. Editor of Accounting Portal since 2011.
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