Article: Form 8919 -- a New Whistle-Blower Tool for Misclassified Workers

December 2007

A new whistle-blower tool for misclassified workers

Form 8919 helps de facto employees who are paid as independent contractors avoid self-employment taxes – and puts their employers on a list of new targets for the IRS and the Department of Labor

A new IRS form that offers significant benefits to workers who are utilized as employees, but paid as independent contractors, also makes it more difficult for companies to avoid employee-related expenses.

Form 8919, “Uncollected Social Security and Medicare Taxes on Wages,” was released in October 2007. The instructions advise filers to use the new form:

“… to figure and report your share of the uncollected social security and Medicare taxes due on your compensation if you were an employee but were treated as an independent contractor by your employer. By filing this form, your social security and Medicare taxes will be credited to your social security record.”

Employees who have been misclassified as contractors by their employers are generally not covered by the employer’s worker’s compensation insurance or other benefits. Also, newly converted “contractors” may underestimate the amount of tax they need to pay and, come April 15, be confronted with a large tax bill that they are not prepared to pay. Form 8919 can help misclassified contractors deal with the latter issue, and in some cases a filer can avoid paying the matching Social Security and Medicare taxes that the employer would normally pay on employee wages.

While that is good for the worker, Form 8919 (like its close cousin, Form SS-8) may serve as a “whistle blower” tool for the IRS, since a filer must (a) identify the parties who paid him/her and (b) explain why he/she is not considered an employee.

Paying the Piper. Employers face significant liability for misclassifying an employee as an independent contractor. That liability usually includes unpaid taxes, penalties, and violations of wage and hour laws, including overtime. (Note: For employers who have never had the pleasure, attracting the attention of the Wage and Hour Division of the U.S. Department of Labor makes an IRS examination feel like a trip to Disneyland.)

It does not require an active imagination to see the IRS using this form to expose employers that dodge payroll taxes by disguising their wages as payments to independent contractors.

If your company is paying as independent contractors any workers who it is treating as employees, the financial benefits you believe you are achieving in the here and now will pale next to the penalties you may incur after you show up on a Form 8919.

Based in Mesa, Arizona, and serving closely held businesses in the East Valley, the Phoenix area and throughout Arizona, Schmidt Westergard & Company, PLLC, is an independent full-service tax, audit, accounting and business advisory firm focusing on the middle market.