EMPLOYEE IS LIABLE FOR FICA TAXES NOT WITHHELD AFTER DETERMINATION OF EMPLOYER'S LIABILITY UNDER SECTION 3509

Rev. Rul. 86-111

ISSUE

If an employer fails to deduct and withhold Federal Insurance Contributions Act (FICA) taxes with respect to an employee and if the employer's liability for the employee's share of FICA taxes is determined under section 3509 of the Internal Revenue Code, is the employee's liability for the unwithheld FICA taxes reduced by the employer's payment?

FACTS

In 1983 an employer, ER, failed to deduct and withhold employment taxes (including income tax withholding) from the wages of a worker because the employer erroneously treated the worker as an independent contractor for purposes of federal employment taxes (including income tax withholding). The employer did not intentionally disregard the requirement to deduct and withhold the employment taxes. In 1984, the Internal Revenue Service reclassified the worker and an employee and determined, under section 3509 of the Code, the amount of ER's liability for unwithheld 1983 federal employment taxes. Pursuant to section 3509, ER was assessed, and ER paid, 20 percent of the unwithheld FICA tax. The relief provisions of section 530 of the Revenue Act of 1978, 1978-3 (Vol. 1) C.B. xi, 119-20, which were extended indefinitely by the Tax Equity and Fiscal Responsibility Act of 1982, section 269(c), 1982-2 C.B. 462, 536, do not apply.

The worker filed a Form 1040, U.S. Individual Income Tax Return, and a Schedule SE, Computation of Social Security self-Employment Tax, for 1983. After ER paid the assessment, the worker filed a Form 1040X, Amended U.S. Individual Income tax Return, claiming a refund of the self-employment tax paid.

LAW AND ANALYSIS

Section 3101 of the Code imposes a tax on wages received by an employee with respect to employment (employee's share of FICA tax). Section 3102 requires that the tax imposed by section 3101 be collected by the employer of the taxpayer by deducting the amount of the tax from the wages paid. Every employer required to deduct the tax is liable for its payment.

Section 31.3102-1(c) of the Employment Tax Regulations provides that the employer is liable for the employee tax with respect to all wages paid by the employer to each employee whether or not it is collected from the employee. The regulation further provides that, until the employee tax is collected from the employee, the employee also is liable for the employee tax with respect to all wages received.

Section 3509 of the Code provides, in part, that if an employer, with respect to any employee, fails to deduct and withhold from wages the employee's share of FICA tax because the employer, without intentionally disregarding the requirement to deduct and withhold that tax, treated the employee as a nonemployee for purposes of that tax, the amount of the employer's liability for the employee's share of FICA tax shall be determined as if the taxes imposed under FICA were 20 percent of the amount determined under section 3101. (The amount is 40 percent if the employer failed to file information returns unless such failure was due to reasonable cause.)

Section 3509(d)(1) of the Code provides, in part, that if the amount of any liability for tax is determined under section 3509, then (A) the employee's liability for tax shall not be affected by the assessment or collection of the tax so determined, (B) the employer shall not be entitled to recover from the employee any tax so determined, and (C) section 6521 shall not apply. Under certain circumstances, section 6521 permits self-employment taxes paid to offset liability for the employee's share of FICA tax.

Section 3509(d)(1)(C) of the Code makes section 6521 inapplicable if the amount of any liability for tax is determined under section 3509. Thus, if the amount of the employer's liability for the employee's share of FICA is determined under section 3509, then section 6521 cannot effect a reduction in that employer liability. The only tax liability determined under section 3509, however, is the employer's. Moreover, section 3509(d)(1)(A) states that the employee's liability is not to be affected by the assessment and collection of the tax determined under section 3509. Accordingly, application of section 3509 to the employer's tax liability for the employee's share of FICA does not preclude the employee from enjoying the benefit of section 6521, if that section is otherwise available.

Section 3101 of the Code imposes FICA tax on an employee. Section 3102 requires an employer to collect the tax imposed by section 3101, and also makes the tax a liability of the employer. Thus, both the employee and the employer are liable for the employee's share of FICA taxes, although the intent is that the employer will collect it from the employee, the employee is ultimately liable for the tax imposed by section 3101. Section 31.3102-1(c) of the regulations.

If section 3509 of the Code applies to an employer, the employer's liability for the employee's share of FICA tax equals a stated percentage of the amount determined under section 3101. However, the employee's liability is not affected by the collection from the employer of the tax liability determined under section 3509. Section 3509(d)(1)(A). Therefore, the employee remains fully liable for the tax imposed by section 3101.

HOLDING

If the employer's liability for the employee's share of FICA tax is determined under section 3509 of the Code, the employee is liable for the entire amount of the unwithheld FICA tax unreduced by any amount paid by the employer.