Employer liability for employee FICA taxes may be offset by self-employment taxes paid by employees

Tax Hot Topics newsletter The IRS issued email advice in ECC 201808016 providing that self-employment taxes erroneously paid by workers misclassified as non-employees may reduce the employer’s liability for the employee portion of FICA tax withholding, provided that Section 3509 does not apply. Employers are still fully liable for any penalties or additions to tax for failure to deduct and withhold.

The email addressed a situation in which an employer treated certain workers as non-employees, and in turn, the workers paid self-employment taxes on their income. Upon examination, the IRS determined that the workers should have been classified as employees, and that the employer was liable for the employer and employee share of FICA tax withholding. The IRS further determined that Section 3509, which limits an employer’s liability for the employee share of FICA tax withholding in situations where the employer improperly treats a worker as a non-employee, was inapplicable because of evidence of intentional disregard of the rules. The statute of limitations for a refund of self-employment tax had closed, but the statute of limitations remained open for the assessment of employee FICA taxes.

Section 6521 provides a favorable solution to correcting misclassified workers’ income by allowing the amount of tax adjustment authorized by law to be reduced by the tax adjustment that is barred by law if the following conditions are present:

  • Wages are erroneously treated as self-employment income (or vice versa)
  • Correction of the error would require the assessment of FICA tax and a refund of self-employment tax (or vice versa)
  • Correction of the error for one tax is authorized by law, but correction as to the other tax is prevented by law, excluding offers-in compromise under Section 7122

Section 6521 treatment does not apply to an employer if any part of the employer’s FICA tax withholding for employee wages is determined under Section 3509. The statutory language is silent as to whether the reverse treatment of this rule is permissible. However, the IRS inferred that an employer may apply Section 6521 if the employer is ineligible for Section 3509 treatment. Therefore, the employer’s liability for the employee portion of FICA taxes under an open statute of limitations may be offset by the self-employment taxes paid under a closed statute of limitations. However, the IRS noted that this application of Section 6521 does not prevent the assessment of Section 6656 penalties for failure to deposit withholding taxes or any other penalties and additions to tax.

Contact Eddie Adkins
Partner, Washington National Tax Office
T +1 202 521 1565

Jeffrey Martin
Partner, Washington National Tax Office
T +1 202 521 1515

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