If your business has been classifying workers as independent contractors when they really met the requirements of employees, well there is a new program: The Internal Revenue Service is offering a program that will allow you to reclassify workers and pay just a small amount to cover past payroll taxes, instead of having to pay the heavy fines that misclassification usually carries.

The program is called the Voluntary Worker Classification Settlement Program, which is part of a larger program called “Fresh Start” that aims to help taxpayers and businesses address their tax responsibilities. Businesses that take part in the program will owe about 1 percent of wages paid to reclassified workers in the past year with not interest or penalty.

Misclassification costs the IRS a lot every year in taxes and there is a reason why. A Wall Street Journal article reports that Labor Secretary Hilda Solis said employers can cut labor costs by 20% to 30% when they classify employees as independent contractors. According to the article, a 2009 Government Accountability Office report found that misclassification in 2006 cost $2.72 billion in unpaid federal taxes. It also results in unpaid taxes for state workers’ compensation and unemployment insurance programs, which hurts the state governments. The White House Obama administration has said that misclassification may affect as many as 30% of all companies in the U.S.

The Voluntary Worker Classification Settlement Program is now open to all businesses, but IRS expects most businesses are small businesses because countless small business owners are dumfounded by the complicated requirements for classifying workers.

To qualify, your business must:

• Consistently treated workers in the past as nonemployees
• File all required Forms 1099 for the workers for the previous three years
• Not currently being audited by the IRS, the Department of Labor or a state agency concerning the classification of these workers

To apply for the program, file Form 8952, this is the application for Voluntary Classification Settlement Program, at least 60 days before you want to begin dealing with workers as employees.

While this new program is good news, the bad news is that IRS will become more strict about classifications of workers going forward, so businesses need to make sure that they are classifying their employees right. To help businesses meet requirements, Solis has announced that the IRS and the Labor Department will work together to share information and “strategically educate” employers about compliance.