IRS develops new form for misclassified workers to claim social security and medical taxes

In keeping with its efforts to ensure employees are properly classified, the IRS has developed a new form for employees who have been misclassified as independent contractors by their employers. Employees will now be able to use Form 8919, Uncollected Social Security and Medicare Taxes on Wages, to calculate and report their share of uncollected social security and Medicare taxes due on their compensation. Form 8919 will be used beginning for the 2007 tax year by workers whose employer did not withhold social security or Medicare taxes. By using the new form, the worker’s social security and Medicare taxes will be credited to their social security record.

Caution. Workers should no longer use Form 4137, Social Security and Medicare Tax on Unreported Tip Income, to report their share of social security and Medicare taxes, as misclassified workers have in the past. Form 4137 should only continue to be used by employees who receive tips to report their social security and Medicare taxes on allocated tips and tips not reported to their employers.

In addition to completing Form 8919, a worker must meet one of several criteria demonstrating that they were an employee of the employer while performing services. The criteria include:

• The worker has 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 that states were are an employee;
• The employer or the IRS has designated the worker as a Code Sec. 530 employee before January 1, 1997;
• The IRS sent other correspondence to the worker stating they are an employee;
• The worker was previously treated as an employee by the employer and are continuing to perform services for the firm in a similar capacity and under similar direction and control;
• The worker’s coworkers are performing services similar to those provide by the worker under similar direction and control and are treated as employees;
• The worker’s coworkers are performing similar services under similar direction and control and have filed Form SS-8 for the firm and received a determination that they are employees; or
• The worker has filed Form SS-8 with the IRS but has not yet received a reply.

Tax ramifications

Significant tax consequences result if a worker is misclassified, intentionally or not, as an independent contractor. Generally, employers must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. Employers generally do not have to withhold or pay any taxes on payments to independent contractors.

To determine if the new IRS form may apply to any of your workers, please call our office for a further explanation.

(IR-2007-203)