IRS Form 8919 & Employee Misclassification: What Religious Organizations Should Know

 

By Dan Busby, CPA

The Internal Revenue Service has developed a new form for employees who have been misclassified as independent contractors by an employer. Form 8919 Uncollected Social Security and Medicare Tax on Wages, will now be used to figure and report the employee’s share of uncollected social security and Medicare taxes due on their compensation.

Generally, a worker who receives a Form 1099 for services provided as an independent contractor must report the income on Schedule C and pay self-employment tax on the net profit, using Schedule SE. However, sometimes the worker is incorrectly treated as an independent contractor when they are actually an employee. When this happens, Form 8919 will be used beginning for tax year 2007 by workers who performed services for an employer but the employer did not withhold the worker’s share of social security and Medicare taxes.

In addition, to be eligible for Form 8919, the worker must meet one of several criteria indicating they were an employee while performing the services. The criteria include:

  • The worker has filed Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, and received a determination letter from the IRS stating they are an employee of the firm.
  • The worker has been designated as a section 530 employee by their employer or by the IRS prior to January 1, 1997.
  • The worker has received other correspondence from the IRS that states they are an employee.
  • The worker was previously treated as an employee by the firm and they are performing services in a similar capacity and under similar direction and control.
  • The worker’s co-workers are performing similar services under similar direction and control and are treated as employees.
  • The worker’s co-workers are performing similar services under similar direction and control and filed Form SS-8 for the firm and received a determination that they were employees.
  • The worker has filed Form SS-8 with the IRS and has not yet received a reply.

By using Form 8919, the worker’s social security and Medicare taxes will be credited to their social security record. To facilitate this process, the IRS will electronically share Form 8919 data with the Social Security Administration.

In the past, misclassified workers often used Form 4137 to report their share of social security and Medicare taxes. Misclassified workers should no longer use this form. Instead, Form 4137 should now only be used by tipped employees to report social security and Medicare taxes on allocated tips and tips not reported to their employers.

What Form 8919 Means for Religious Organizations

Could churches and charities be impacted by the media coverage of the new Form 8919?  Yes.  Many organizations misclassify workers as independent contractors who are really employees.  In addition to subjecting the workers to the incorrect social security system, this misclassification can affect religious workers in many ways, including:

  • Health insurance and other insurance coverage.  Many churches and charities require an employee to work 30 hours per week to qualify for health insurance coverage. If a worker regularly working 30 hours a week who should have been considered an employee is treated as an independent contractor, they have been improperly denied health insurance coverage.
  • Workers’ compensation coverage.  Most churches and charities only include employees on their worker’s compensation insurance policy. Therefore, a worker misclassified as an independent contractor is almost always improperly denied worker’s compensation coverage.
  • Fair Labor Standards Act coverage.  If a worker is misclassified as an independent contractor, a church or charity will not make a further determination as to whether the worker is covered or exempt under the Fair Labor Standards Act—independent contractors are not subject to the Act. Therefore, a worker who is actually an employee and should have been subject to the minimum wage and time-and-one-half overtime rules is generally denied these benefits.

Back to the social security issue—if a worker is misclassified as an independent contractor (and given Form 1099-MISC) instead of receiving Form W-2 as an employee, the worker generally must pay the full 15.3% social security tax instead of having the tax shared with the organization:  7.65% paid by the church and 7.65% paid by the employee.

However, with the new Form 8919, many independent contractors-turned-employees may only have to pay social security tax of 7.65%. And, if the taxpayer has a good case to only pay 7.65%, guess where the IRS will go to find the other 7.65%? You are correct! They will go back against the church or charity for the rest of the social security tax.

Lesson to be learned:  Worker classification by churches and other charities is an important issue not to be taken lightly. Carefully consider the employee vs. independent contractor rules. When in doubt, classify the worker as an employee and reduce the risks to the organization.