Tax & Business Insights

What Are Your Workers?  

IRS Classification Form 8919

Volume 20 Issue 1 --  January/February 2008

In December, 2007, the Internal Revenue Service (IRS) released a new Form 8919, entitled “Uncollected Social Security and Medicare Taxes on Wages.” There has always been (and will be) a problem of classifying workers: are they employees or independent contractors? See our earlier newsletters for basic guidelines concerning the status of workers.

Now, the problem of classification of workers has become a political issue both nationally, and in some cases, locally. Many perceive the status of illegal or poorly documented workers (“Podocs”) as one of the most important issues facing the country. Most of these issues have been discussed in newsletters available on our website.

Employers are required to have a Form I-9 for each worker. In theory, if the I-9 is properly completed and maintained, an employer should be able to prove that all of the workers are valid employees for immigration purposes. Some employers do not have I-9s for all employees. They run the risk of criminal prosecution by the Department of Homeland Security (DHS).

The thrust of the new Form 8919 is to alert employees, or would-be employees, that they must file Form 8919 if they performed services for a firm, did not have Social Security or Medicare withholding, and are not independent contractors. In many instances, the would-be employees will not understand fully the criteria of who is an employee and who is an independent contractor.

The new Form 8919 seems to be designed to allow misclassified workers to become eligible for Social Security benefits in the future. Some workers who have claimed independent contractor status for many years, perhaps all of their working lives, find that when they retire (or want to retire) they are not eligible for Social Security benefits because they have no credits.

It is believed that Form 8919 is an effort by the IRS to thwart the activity of misclassifying workers as independent contractors in an attempt to avoid the employee reporting and withholding requirements. If an individual files Form 8919 stating that he or she has provided services and there is no withholding, it is possible that the IRS might investigate and decide that the worker is an employee, rather than an independent contractor.

Many small employers with workers alleged to be independent contractors are faced with a dilemma. If they tell the workers they are going to start withholding taxes from their pay, and the workers do not receive cash in the amount that they received as independent contractors, many will quit. This poses a real dilemma for the business. In fact, some businesses will be forced to close.

Individuals who feel that illegal immigration has gotten out of hand may say that such business failures are deserved by those that hire Podocs. There are many restaurants or facilities, some nationally owned or run, that rely on Podoc workers. In some cases they will have to stop relying on those workers and in other cases they will make a conscious decision to continue and take their chances.

In a recent example that we have seen, a franchisee of a national fast food chain had workers who did not have SSNs or ITINs, and did not have I-9 forms completed. An accounting firm urged such employers to issue Forms 1099 to the Podoc workers, thinking that, out of many bad alternatives, this was the best one, and that it was better to have some record of what was paid than to simply pay the workers and not have any reporting regarding the payment. On the other hand, filing the 1099s would alert the IRS that some amounts had been paid to the workers.

A better practice is to have an I-9 for each worker and do the appropriate reporting. It is certain that this advice will not be followed by some employers or by those who are not even aware of these requirements.

There are additional risks as well. In a recent IRS audit, where there were many undocumented workers, the IRS disallowed all deductions for compensation paid to undocumented workers. On appeal, the IRS relented and allowed the deductions for such workers. Some states have adopted statutes denying tax deductions for compensation paid to undocumented workers.

The likely impact of Form 8919 is hard to determine. If a large number of employees/independent contractors send in the form, it is likely that the IRS will be unable to do the required number of employment tax audits that would be needed, because the IRS is already strained. Also, the IRS could turn the information over to the DHS.

If you have questions about this situation and need further guidance, you may want to contact us or an employment tax firm.

Copyright 2008
By Tax and Business Professionals, Inc.
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