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.
Partner, Washington National Tax Office
+1 202 521 1565
Partner, Washington National Tax Office
+1 202 521 1515
Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.