1099 reclassified as W2, employer issues

[jeff501]

A client was misclassified as a contractor and received 1099MISC forms for both 2009 and 2010. She should have been classified as an employee, we contacted the state unemployment office and with their assistance, she was correctly reclassified as an employee and W2 forms for both years were later issued by her former employer.

She filed amended returns and has received refunds. The parting with the employer was not amicable. The former employer is now sending threatening letters to her demanding she repay her portion of Social Security and Medicare taxes they had to pay as result of their error. The letter stated in part they "may consider stronger collection efforts" if she doesn't pay. To me, the key word in the prior sentence is "consider". She's worried they may try to contact a collection agency but it sounds like they are using strong arm tactics to try to collect without much of a basis.

I don't feel she has to repay them due to their error in classifying her as a contractor, she met all the employee requirements. She did however, sign a W9 at time of hiring not knowing the law.

Anyone ever dealt with something similar to this? Is there any law that would require her to repay them the Social Security and Medicare?

[luke]

I think I would send copies of the letter to the state unemployment office that helped with the re-classification (maybe also to state dept of labor) and also a copy to a "labor" attorney asking him to respond!

[Nashville]

I doubt It

I'm not sure whether an employee is liable to the employer for any withheld taxes if the employer had the opportunity to deduct them and failed to do so.

Absent any strong statute to the contrary, I can't imagine a judge anywhere who would rule that the employee would have to indemnify the employer.

[geekgirldany]

It appears they can not if the tax was paid under section 3509. I read it but I am sleepy right now so you will have to look that up.

http://www.irs.gov/publications/p15/ar02.html

Treating employees as nonemployees. You will generally be liable for social security and Medicare taxes and withheld income tax if you do not deduct and withhold these taxes because you treated an employee as a nonemployee.

You may be able to calculate your liability using special section 3509 rates for the employee share of social security and Medicare taxes and the federal income tax withholding. The applicable rates depend on whether you filed required Forms 1099.

You cannot recover the employee share of social security, or Medicare tax, or income tax withholding from the employee if the tax is paid under section 3509. You are liable for the income tax withholding regardless of whether the employee paid income tax on the wages. You continue to owe the full employer share of social security and Medicare taxes.

The employee remains liable for the employee share of social security and Medicare taxes. See Internal Revenue Code section 3509 for details. Also see the Instructions for Form 941-X.

Section 3509 rates are not available if you intentionally disregard the requirement to withhold taxes from the employee or if you withheld income taxes but not social security or Medicare taxes. Section 3509 is not available for reclassifying statutory employees. See Statutory employees, earlier.

If the employer issued required information returns, the section 3509 rates are:

For social security taxes; employer rate of 6.2% plus 20% of the employee rate of 6.2% (4.2% for 2011), for a total rate of 7.44% (7.04% for 2011) of wages.

For Medicare taxes; employer rate of 1.45% plus 20% of the employee rate of 1.45%, for a total rate of 1.74% of wages.

For income tax withholding, the rate is 1.5% of wages.

If the employer did not issue required information returns, the section 3509 rates are:

For social security taxes; employer rate of 6.2% plus 40% of the employee rate of 6.2% (4.2% for 2011), for a total rate of 8.68% (7.88% for 2011) of wages.

For Medicare taxes; employer rate of 1.45% plus 40% of the employee rate of 1.45%, for a total rate of 2.03% of wages.

For income tax withholding, the rate is 3.0% of wages.