I have never had one of these before and I don't have the letter yet, but I know it is coming. So my question is, assuming the employer is docked for the FICA taxes he should have paid on the compensation (for which a 1099Misc was issued), what happens to the self-employment tax the "employee" paid when he filed his tax return? What if he deducted expenses on a Schedule C? Is any adjustment made to the TP's 1040?
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Going Out on a Limb
Burke, I'm going out on a limb. I think I know where you are headed with your question, and my feeling is that you are correct.
Taxpayer may file an amended return removing self-employment tax, but also most of the expenses deducted on Schedule C are now deductible (if at all) on a 2106. This can be devastating since:
1) An "ordinary and necessary" expense of doing business now must pass further tests (such as convenience of the employer, etc.) in order to be deductible.
2) Expenses which survive the requirements above now must exceed 2% of AGI in order for the deductions to have any effect.
3) If taxpayer suffers a "phase-out" of itemized deductions, those expenses which exceed 2% are eroded away even further. -
The IRS does not necessarily have to go after the worker. The employer gets hit with what he/she should have done. The worker is a totally different case that doesn't come into play unless the worker gets audited.
On the other hand, check out page 5-22 and 5-23 in TTB. See the references to Forms 4670 and 4669, which may help the employer if the employee already paid the tax.Comment
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