For as long as I have prepared taxes, I have had clients who received a 1099Misc instead of a W-2. Basically, the employer says that the taxpayer is not a true employee but an independent contractor. It could be the business owner does not want to pay the matching SS and Medicare or actually deal with any withholding so they work out an arrangement with their "employees." Or the business owner does not know the rules and is going with what they see their competitors are doing. Unfortunately, most of these employees get a surprise a tax time when they see how much they owe the IRS since nothing was withheld. For the most part, they complain but they pay. For those who did not agree to contractor treatment, there was a way to lessen the tax they would be paying.
For years, taxpayers who
thought they should have been treated as employees could fill out Form
4137 (Unreported Tips) and just pay their half of the SS and Med. But
it was a time consuming mess since you were suppose to mark out the
word "tip" and write in "wages" over the form and since the form was changed no e-filing. They would still have to pay taxes on what they earned but they would not owe the employer's half of the SS and Med.
The IRS had just issued a draft of Form 8919-Uncollected Social Security and Medicare on Wages. This form allows a taxpayer who believes they are not a contractor to save themselves the matching SS and Med. Form 8919 itself is fairly simple and just asks for the employer's information, whether a 1099Misc was issued and calculates the employee's SS and Med payment to be transfered to their 1040. What is not simple is the "reason code" section. For each employer a taxpayer lists, they have to identify why they are using the 8919. Have they received a determination letter from the IRS, were they classified as an employee before but now being treated as contract labor, are others doing the same work being treated as employees? But what if the taxpayer does not meet any of the reasons? The final reason is that an SS-8 has been filed with the IRS a but no determination letter received. Bottom line, if a taxpayer wants to use Form 8919 they will have to file a SS-8 and that is no easy matter. It is a 3 page form asking the taxpayer to outline their working relationship with the employer. Who controls what; time, job duties, equipment, training, etc. It will be interesting to see if some taxpayers decide to pay the extra tax to keep from filling out the SS-8.
The need for Form 8919 and SS-8 is to cut the Tax Gap by finding who may be paying employees as contractors so further investigation can targeted where it might do the most good. Hopefully, investigations will also identify those long term non-filers. The taxpayers who want to be paid "under the table" so that they don't have to pay taxes like an employee does. The problem is that someone has to start the process by submitting a SS-8 and that could mean fallout from the employer they turned in or others in that business. They have to be willing to be a whistleblower.