In a report issued in June, the Treasury Inspector General for Tax Administration (“TIGTA”) found that employers continue to mis-classify employees as independent contractors even after rulings by the I.R.S. . Employers are responsible for one half of the Social Security, Medicare, and Unemployment taxes (1.45% for Medicare, 4.2% in wage withholding, and an additional 6.2%, in addition to 6% up to a cap for unemployment) for all employees, but Independent Contractors are individually responsible for their entire liability. Improper worker classifications have been found to contribute to the $385,000,000 “tax gap” – the difference between total taxes owed and collected – and has been a major enforcement initiative for the I.R.S. in recent years.
The Service has offered a Determination of Worker Status Program (referred to as the SS-8 Program) since 1994 specifically to allow employers to properly identify whether a worker is an independent contractor or an employee. The SS-8 Program Worker Determinations are supposed to provide ongoing guidance to employers, but the TIGTA report found that many employers do not comply with those rulings on an ongoing basis. Employers who do not properly classify their employees can be subject to significant penalties including, but not limited to, the potential for a 100% trust fund recovery penalty assessable directly against the person responsible for payroll tax compliance.