Specially trained IRS auditors are investigating errors made by employers on the withholding of federal income taxes, Federal Insurance Contribution Act (FICA), and Federal Unemployment Tax Act (FUTA). Another focus of these payroll tax audits is on the proper classification of workers as common law employees instead of independent contractors.
It is extremely important that employers are fully cognizant of the payroll tax requirements. Generally, employers withhold payroll taxes from employees’ wages at the mandated rate of 6.2% (for FICA) and 6.0% (for FUTA), up to a certain threshold. For 2015, this threshold is $118,500 for FICA and $7,000 for FUTA. The IRS auditors are focusing on the reporting issues in applying the FICA and FUTA wage bases to employees for multiple legal entities. Employers need to be aware of the rules to determine when they are required to restart the $118,500 social security and $7,000 FUTA wage bases if an employee works for more than one related employer. In general, the wage bases are applied separately, but there are exceptions where single FICA and FUTA wage bases are permitted. Exceptions include: payroll tax reporting for concurrent employees, payroll tax reporting following an acquisition or disposition, and payroll tax reporting for leased employees.
The issue of an employer classifying a worker as an employee or independent contractor is one that has been a major focus of the IRS in recent years. Employers need to be familiar with the factors that determine when a worker is an employee or independent contractor. Some of the common factors are predicated on if the employer has the right to determine both the manner and method of the tasks performed, if the employer has a right to direct or control the financial and business aspects of the worker’s job, and how the worker and employer perceive their relationship. Common law employees receive a W-2, “Wage and Tax Statement.” On this form their wages are subject to payroll taxes. On the other hand, income paid to independent contractors is reported on form 1099-MISC and is not subject to withholdings. An error in classification can result in unreported payroll taxes in which penalties and interest may be assessed by the IRS. The IRS generally presumes workers are employees rather than independent contractors.
The IRS has some forgiveness programs in place. The relief will depend on whether the mistake was willful or not and whether or not payroll tax returns were filed. Relief is under section 530 of the Revenue Act of 1978 and the voluntary Classification Settlement Program (VCSP) implemented by the IRS.
Should you have any questions or issues related to the information included in this article, contact your Marcum Tax Advisor.