1099 Risk Blog

Misclassification Epidemic: Part 2

The IRS was alerted to a growing epidemic of worker reclassification by a Treasury Department report issued last month. In our last blog post on misclassification, we discussed why employee reclassification was on the rise in America. In the second part of this short series, we will look at what the IRS is planning to do to educate employers and tax payers about employee classification and employment tax related issues.

“The Internal Revenue Service Has Taken and Plans to Take Many Positive Actions to Address Worker Misclassification.” So says the heading preceding the Treasury’s first recommendation to the IRS. To their credit, the IRS does seem to have some significant educational efforts in place:

The Form SS-8 Worker Status Determination program – Employers may ask the IRS to come into their business and ensure they are compliant. Workers can also use the SS-8 to request a review of their status. Problem: If the status is incorrect, it’s an open door for the IRS to investigate further (See: audit. See also: $$$$$$.)

-Online services and other publications – The IRS has created various resources, making them available on their website, IRS.gov.  They have also featured worker classification issues in their publications such as e-News for Tax Professionals and the IRS Newswire.

-Tax Talk Today – This and other talks on employment taxes and worker classification have been delivered to professional organizations such as the American Bar Association and the American Payroll Association.

-Uncollected Social Security and Medicare Tax on Wages (Form 8919) – In response to a previous Treasury report, the IRS created this form for Section 530 employees and misclassified employees to report their share of employment taxes. According to this Treasury Report, Form 8919 can be used by misclassified employees to report their income and pay only half of their employment taxes.

In addition to the IRS’s public educational efforts, there is also an internal structural issue that needs to be addressed.  In the section of the report entitled, “The Internal Revenue Service Does Not Have an Agency-Wide Employment Tax Program to Address Worker Classification,” the Treasury Department states the following:

IRS business divisions communicate and coordinate with each other regarding employment tax issues.  However, there is no single point of accountability for employment tax below the IRS Deputy Commissioner level, and there is no agency-wide strategy to coordinate the decision-making process and efforts among the divisions.

The fact that there is no centralized division/department/plan/communication strategy to deal with employment classification or employment taxation may speak to why this issue has become rampant and largely unchecked.  The main suggestion from the Treasury is to simply get organized – to create a program dedicated to addressing the issue of worker classification, and further, to coordinate the various business divisions within the IRS.

Treasury’s second recommendation was to conduct a study for employment taxes, finally measuring the impact of worker misclassification on the tax gap (and finally updating the decades old compliance study conducted in 1986).

The two recommendations were accepted by the IRS. The question is how long will it take to execute, and what will they do to fix whatever problems they unearth?
 How will your business be affected should the Treasury get more organized in addressing misclassification? Do you have reclassification risk?

To get up to date information on these issues, and what you can do to make using independent contractors safer for your business, join us on April 28th as leading employment attorney Eric Rumbaugh presents a free webinar entitled, "Independent Contractor Compliance: What You Need to Know in 2009."  Register here.

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