I Am Being Misclassified

[llworking]

The IRS deals with their regulations and what taxes have to be paid to them. They don't deal with UE and workman's comp issues. That is up to the states.

Now you have heard it.

I have never heard of a state not cooperating with a federal decision on classification. In fact, once the employer is required by the IRS to issue proper payroll, with withholding and a W2 at the end of the year, the employer has no choice but to treat the employee as an employee for state purposes as well.

The same would apply if the state was the one who determined that someone was misclassified. The feds would certainly have no reason to not cooperate with that as well.

[hr for me]

In the end, the employer has to use the classification that is most beneficial to the IC/ee -- if one states they must be an employee, then they must even if the other would fall under IC.

[Taxing Matters]

The same would apply if the state was the one who determined that someone was misclassified. The feds would certainly have no reason to not cooperate with that as well.

The IRS will apply the federal law factors for determining whether one is an employee for federal tax purposes. It is certainly not bound by the state agency determination. If the state criteria would be broader such that a person would be classified as an employee by the state but not under the federal criteria then the IRS still applies the federal criteria and the person would not be classified as employee for federal tax purposes. While not common, there are instances where an employee is indeed treated as an IC for one purpose (e.g. federal tax) but not another (e.g. state unemployment comp program).

[PayrolGuy]

The IRS will apply the federal law factors for determining whether one is an employee for federal tax purposes. It is certainly not bound by the state agency determination. If the state criteria would be broader such that a person would be classified as an employee by the state but not under the federal criteria then the IRS still applies the federal criteria and the person would not be classified as employee for federal tax purposes. While not common, there are instances where an employee is indeed treated as an IC for one purpose (e.g. federal tax) but not another (e.g. state unemployment comp program).

And when an employer's State UI wages don't match the reported Federal UI wages there are problems for all.

[hr for me]

The IRS will apply the federal law factors for determining whether one is an employee for federal tax purposes. It is certainly not bound by the state agency determination. If the state criteria would be broader such that a person would be classified as an employee by the state but not under the federal criteria then the IRS still applies the federal criteria and the person would not be classified as employee for federal tax purposes. While not common, there are instances where an employee is indeed treated as an IC for one purpose (e.g. federal tax) but not another (e.g. state unemployment comp program).

In my 20+ career, I have honestly never seen an employer try to do this. I dont' know of any payroll systems that would handle this well. Because you get into FICA type taxes too along with 401k compensation calculations, etc.

[llworking]

The IRS will apply the federal law factors for determining whether one is an employee for federal tax purposes. It is certainly not bound by the state agency determination. If the state criteria would be broader such that a person would be classified as an employee by the state but not under the federal criteria then the IRS still applies the federal criteria and the person would not be classified as employee for federal tax purposes. While not common, there are instances where an employee is indeed treated as an IC for one purpose (e.g. federal tax) but not another (e.g. state unemployment comp program).

The point I was making, is that the IRS is not going to object to an employer voiding a 1099-Misc and replacing it with a W2, which the employer would have to do to fix the state decision anyway.

[budwad]

The point I was making, is that the IRS is not going to object to an employer voiding a 1099-Misc and replacing it with a W2, which the employer would have to do to fix the state decision anyway.

I think you just confirmed what I posted. All the IRS does is to replace the 1099 with a W-2 on a misclassification. And if the IC has been paying the self-employment and Medicare tax, they don't much care that the W-2 has zero deductions for those taxes.

It is the states that will do something about the misclassifications because they do not get payments into the UE fund and the workman's compensation fund.

[bcr229]

In addition to filing the SS-8 with the IRS you can also request a determination from the state of Ohio. I don't know if their process is any faster, but it looks like you can make the request anonymously if you are concerned about retaliation. Ohio will also let you list every potentially affected employee.

Go to https://jfs.ohio.gov/ouc/Compl_Efforts.stm and then click the link in #3 to fill out the secure online form for the state.

[llworking]

I think you just confirmed what I posted. All the IRS does is to replace the 1099 with a W-2 on a misclassification. And if the IC has been paying the self-employment and Medicare tax, they don't much care that the W-2 has zero deductions for those taxes.

It is the states that will do something about the misclassifications because they do not get payments into the UE fund and the workman's compensation fund.

Again Bud, you are incorrect. The IRS would not accept a W2 without proper withholding for Social Security and Medicare. They would most sincerely "care".

[Taxing Matters]

I think you just confirmed what I posted. All the IRS does is to replace the 1099 with a W-2 on a misclassification. And if the IC has been paying the self-employment and Medicare tax, they don't much care that the W-2 has zero deductions for those taxes.

From the sound of it you seem to think that if the employee paid all the income tax and self-employment tax (and self-employment tax includes both Social Security & Medicare taxes) that the employer would owe nothing to the IRS as a result of the misclassification. If so, you do not understand the tax law on this. IRC § 3402(d) provides the rule that applies when the employee has paid the tax:

(d) Tax paid by recipient.--If the employer, in violation of the provisions of this chapter, fails to deduct and withhold the tax under this chapter, and thereafter the tax against which such tax may be credited is paid, the tax so required to be deducted and withheld shall not be collected from the employer; but this subsection shall in no case relieve the employer from liability for any penalties or additions to the tax otherwise applicable in respect of such failure to deduct and withhold.

(Bolding added). So even if the employee paid all the tax, the IRS will still set up the employer for the penalties that would apply for the failure to deduct and withhold, including the late deposit penalty, late payment penalty, possibly a late filing penalty, and of course interest. There is also the penalty for the failure to file timely Forms W-2. And there may also be federal unemployment tax for the employer to pay as well. Added all up these penalties and taxes can be substantial, especially when multiple employees were misclassified. So the IRS does very much care about the misclassification even when the employee paid the tax — there is still money for the IRS to get.