Dec 20, 2007

Am I an Employee or Independent Contractor??- New Updates that help your tax debt

Finally, the IRS has made it simple to contest your worker status. Some contend that between 30-40% of workers are misclassfied as independent contractors rather than employees. (The IRS has a study of 1984 data that has missclassification at 15%- but it is much greater due to the increased payroll tax obligations- however- it has not been studied since 1984) The IRS conducted 11,380 audits of "independent contractor status" in 1988-1994 and found over 483,00 misclassified workers or 42.4 misclassfied workers per audit. The tax effects to the misclassified worker is staggering (the tax effects to the employer who misclassified can be as much as 45.3% of the wages paid but not withheld):

1. Workers classified as independent contractors are responsible for all 15.3 % of the FICA and Medicare tax- if they were an employee, this tax would be withheld and the worker would only be responsible for 1/2 of this tax (7.65%)- not the full 15.3%- the employer is responsible for the other 1/2 of the tax.
2. Workers classified as independent contractors have no federal income tax withholding. Hence, if they do not make estimated tax payments (i.e. quarterly payments to the IRS that are an estimate of the total tax due at the end of the year), then they are going to have a large year end bill with significant estimated tax penalties.

On Dec. 20th, 2007, the IRS finally issued a Form (Form 8919) that will facilitate the contesting of the worker classification status on your current year tax return. Prior to this form, you would have to use a Form 4137 (which is a tip reporting form) to attempt to clarify this issue. Now, you will be able to get credit for the FICA tax while the worker classification issue is pending with the IRS (see my prior blogs on this issue in Worker Classification). Request for Determination of your Worker status is done on Form SS-8.

This is a complicated issue that needs to consider all factors- especially if you are an employee or an independent contractor. If you are incorrect in the assumption that you are an employee, the IRS will ask you for the remainder of the 7.65% of tax. Consult a competent tax professional if you have these problems.

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