July 15, 2008
Reduced Taxes Due on Reclassified Employees
Filed under: News
Vision Payroll

In Private Letter Ruling 200825043, the IRS concluded that employers who receive a determination letter from the IRS that someone previously classified as an independent contractor should be classified as a employee may use §3509 to reduce the amount of employee FICA tax and federal income tax payable. The federal withholding in such cases is reduced to 1.5% of wages regardless of what the employee claims on a Form W-4. The FICA tax rate is reduced from 7.65% to 1.53% on the employee’s portion. The employer’s rate remains at 7.65%. If the employer did not file Form 1099-MISC for payments made to the newly-classified employee, the employee withholding rates are doubled. Furthermore, no interest is charged on the late payment of the employee’s portion of the tax.

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