Newland's Business Notes

Invalid SSNs – What To Do? (Part 1)

Volume 10 Issue 6 -- November/December 2006

The new Gordian Knot for many employers is what to do with employees with invalid Social Security Numbers (SSNs). The ancient Gordian Knot, which legend says could not be untied, has become a metaphor for an intractable problem. Alexander the Great allegedly solved the problem by severing the Gordian Knot with his sword.

For many employers, a modern Gordian Knot can arrive in the form of an inquiry from the Social Security Administration (“SSA”) about the status of employee SSNs. These inquiries, sometimes called “no match” letters, create a problem no swift stroke of a sword, or anything else, will resolve easily.

This will be the first of two newsletters on this subject. It is unlikely that new legislation will resolve the problems discussed here.

According to The Washington Post (September 10, 2006, P. A-1), there are an estimated 12 million undocumented immigrants in the United States .  Hereafter, these individuals will be referred to as “Podocs” (for no, or poorly documented, credentials). Podocs represent an intractable problem for many employers.

Many employers, particularly in certain businesses, cannot function without Podocs. If they hire Podocs, they must pay them, which requires an SSN.  If the Podocs get paid, they are required to pay income tax on the amounts received.

If the Podocs give the employer an invalid SSN and the employer uses it for tax and Social Security purposes, the employer may receive a “no match” letter from the SSA, which says that the SSN given by the employee does not match the number on the SSA’s records.

If the employer does not withhold federal and state taxes, plus Social Security contributions on amounts paid to employees, the employer can be fined or even criminally prosecuted.

Less severe, but very serious is an Internal Revenue Service (IRS) employment tax audit.  In such an audit, alleged independent contractors (here Podocs treated as independent contractors) could be reclassified as “employees.”

If Podocs are reclassified as employees then the employer will owe back withholding taxes on the reclassified Podocs.  Additionally, it is the practice of the IRS to give the reclassified independent contractor Podoc (now an employee) tax and Social Security credits representing the amounts deemed paid to an employee. 

One of the many problems facing the IRS and the SSA is how would such reclassified credits be recorded if the Podoc has an invalid SSN?

Although many Podocs are in the country illegally, it is possible for some of them to obtain a valid “ITIN,” Individual Taxpayer Identification Number, which the IRS uses to record the withholding for such individuals for tax filing purposes. Advocates of tighter border control question this practice and allege that this is a “backdoor way” for Podocs eventually to receive government recognition and improve their status collectively and individually.

To avoid, or reduce, the problem with invalid SSNs, some employers have been issuing Forms 1099 to Podoc workers who are actually employees, effectively calling the Podoc an independent contractor. Forms 1099 are usually given to independent contractors for services performed like paving driveways or mowing yards.

Under current law, if someone pays an independent contractor more than $600 per year, the independent contractor is supposed to receive a 1099 and pay tax on the amounts received.  A 1099 allows the IRS to match the payer’s and payee’s payments and receipts.  Amounts paid pursuant to a 1099 are usually not subject to withholding for income tax and Social Security purposes.

Some accountants have suggested that employers issue 1099s to Podocs who clearly are not independent contractors so that the amounts paid to Podocs are documented in some fashion.  If an invalid SSN cannot be used then perhaps the best of bad choices is to issue a 1099.  Most certainly, the IRS and Department of Homeland Security would not approve of this practice of issuing 1099s to erstwhile Podoc employees. 

In the next issue, we will explore other aspects of this knotty problem.

Copyright 2006

Published by the law firm of Newland & Associates, PLC
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