Employment tax audits generally involve 2 primary issues – “wage issues” or “worker classification issues.” Wage Issues generally involve a taxpayer who has treated workers as employees by issuing Forms W-2 for wages. , and the issues being examined are considered to be additional compensation that should also have been reported as wages. Examples of wage issues include payments under a non-accountable plan, compensation paid to employees in property (i.e., stock, stock options), payment of non-qualified deferred compensation, severance payments to former employees, and fringe benefits not excludable by a specific Code section or that fail to meet the statutory requirements for exclusion from wages.
When a taxpayer does not treat workers as employees, the examination of whether the payments are subject to employment taxes is generally considered a worker classification issue, i.e., the payments are subject to employment taxes if the examiner determines that the workers should have been treated as employees. If the taxpayer failed to issue a Form W-2, Wage and Tax Statement, to the worker and only issued a Form 1099-MISC, Miscellaneous Income, (or any other form in the family of Forms 1099), the issue is generally considered a worker classification issue.
The proper identification of the type of issue is essential for determining the examination procedures and the tax rates applicable to the issue. Both “wage issues” and “worker classification issues” are fact intensive inquires involving complex legal standards.