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How to Change 1099 Contractors to W2 Employees

It’s the age-old tale of the 1099 and W2. You may have heard the long and gruesome story told by business owners who have been assessed thousands of dollars in back payroll taxes, interest, and penalties because they classified a worker as a contractor (1099) rather than an employee (W2).

Could it happen to you?

It’s possible. You may have workers who should be classified as employees but are treated as independent contractors. What happens if you try to do the “right” thing and change them over to W-2 employees? Will the IRS come after you for all the prior years that they worked as contractors and charge you an arm and a leg for your poor judgment?

Depending on the number of workers you’ve misclassified, and how many years it’s happened, the costs could be prohibitive. But if you bite the bullet and ‘fess up, the IRS will provide a way for you to reclassify your employees and pay only pennies on the dollar in restitution.

The Pennies-on-the-Dollar Come-Clean Program is the IRS Voluntary Classification Settlement Program (VCSP) for business owners who want to change their worker classification going forward.


To be eligible, you must:

  • Have reported your independent contractors consistently in the past
  • Not be currently under audit

If you decide to participate in the VCSP, you will need to agree to treat the class or classes of workers covered by the agreement as employees for future tax periods. In exchange, you will receive:

  • Reduced employment tax liability. You will pay only 10 percent of the taxes that would have been due on compensation paid to the workers for the most recent tax year.
  • No interest or penalties
  • Audit protection for misclassifications in prior years
  • The honor and privilege of the ability to treat workers as employees moving forward

You must apply to participate in the VCSP by using IRS Form 8952, Application for Voluntary Classification Settlement Program. File at least 60 days before the date when you want to begin treating your workers as employees. The IRS will make every effort to process your application in sufficient time to allow for the voluntary reclassification on the requested date. If you are accepted into the VCSP, you enter into a closing agreement with the IRS to finalize the terms of the VCSP and make full payment of the amount due.

Biting the bullet and coming clean will be in your best interest in the long run. A little pain, in the beginning, will pay off with fewer IRS headaches down the road. Contact C&B for support at 201.787.6542.

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