New Form for Employees Misclassified as Independent Contractors

Employees now have a new procedure to establish whether they were in fact an employee rather than contracted labor if an employer so classified them and paid them as such independent contracted labor. The difference being as to the employee is who pays the payroll taxes. An employee has mandatory withholding from their gross payroll Social Security and the various other taxes attributable to wages whereas independent contractors bear those costs, but generally after deducting business expenses incurred in the conduct of business, therefore the basis of which those taxes are computed against is generally lower.

There is substantial abuse in the area of employee/independent contracted labor. In many cases employers attempting to avoid the cost of payroll taxes, insurance, and other costs will attempt to misclassify employees as independent contractors where in fact the functions of the individual performing services are in fact that of an employee. Not only does this misclassification put the payroll tax burden wrongfully on the employee but also gives the employer so doing an unfair competitive advantage in the market place by lowering the cost of labor. On the other hand, a large number of who would otherwise be classified as employees will attempt to be paid without tax to increase their respective take home pay while looking to be provided all of the benefits of an employee. Again, this is an area of substantial abuse and an area where substantial tax revenue loss is generated to the government.

A worker who received a Form 1099 for services provided as an independent contractor must report the income on Schedule C and pay self-employment tax on the net profit using Schedule SE. However, if the worker was actually an employee, rather than an independent contractor, the worker is not required to pay the full self-employment tax, and expenses can only be deducted as an itemized deduction.

In an attempt to curb the abuses on both sides of the employer/employee spectrum the Internal Revenue Service has instituted a new program in which a “misclassified employee” can inquire with the Service by filing IRS Form 8919 which is entitled Uncollected Social Security and Medicare Tax on Wages. By doing so the misclassified employee will then be credited with the appropriate taxes and the Internal Revenue Service will be alerted to the potentially questionable employment practices of the employer.

To be eligible to use Form 8919 you must meet one of several criteria indicating that you were an employee while performing these services. The criteria include:

You filed Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, and received a determination letter from the IRS stating that you are an employee of the firm.

You have been designated as a “section 530 employee” by your employer or by the IRS prior to January 1, 1997.

You have received other correspondence from the IRS that states you are an employee.

You were previously treated as an employee by the firm and you are performing services in a similar capacity and under similar direction and control.

Your co-workers are performing similar services under similar direction and control and are treated as employees.

Your co-workers are performing similar services under similar direction and control and filed Form SS-8 for the firm and received a determination that they were employees.

You have filed Form SS-8 with the IRS and have not yet received a reply.