CCA 201020014: Counsel discussed FICA liability and worker classification rules

Plain-English summary

In an internal Chief Counsel email, the sender considered the interaction among IRC §§ 3121(b)(20), 3121(d)(1), and 3509 when an employer failed to pay FICA tax. The email states that if the failure resulted from erroneous reliance on § 3121(b)(20), the issue was not worker classification under the cited Flamingo Fishing analysis, so § 3509 would not apply, although an underlying employment relationship would still be required for FICA. The sender concluded that § 6521 could apply and stated that § 530 was not relevant to whether compensation or services were excluded from wages or employment, while noting that the taxpayer appeared to fail the reporting consistency test because no Forms 1099 were filed.

Ruling snapshot

• Question: Does IRC § 3509 apply when an employer fails to pay FICA tax based on an erroneous exclusion from wages or employment?
• Outcome: Advice given
• Key authorities: IRC §§ 3121(b)(20), 3121(d)(1), 3509, 530, and 6521

Full text (IRS public release)

ID: CCA_2010041612241041 Number: 201020014
Release Date: 5/21/2010
Office: -----------------------------
UILC: 3509.00-00

From: ---------------
Sent: Friday, April 16, 2010 12:24:13 PM
To: ------------------------------------------- Cc: Subject: RE: 3121(b)(20), 3121(d)(1), and 3509 interrelations

I see your point and it's a complicated question b/c the issues merge together somewhat. However, if the ER failed to pay FICA tax b/c of erroneous reliance on section 3121(b)(20), then Flamingo Fishing says it's not a worker classification issue and 3509 doesn't apply. For FICA to apply, there has to be an underlying employment relationship, either as common law EE, officer, etc. But that doesn't mean the employee status itself was at issue or the reason for the failure to pay FICA.

So it seems that we wouldn't apply 3509, so that 6521 could apply.

Note that it's also our view that section 530 is also not relevant to the examination if the question is whether compensation is excluded from wages or services are excluded from employment. (Of course in this case, it appears that taxpayer would fail the reporting consistency test anyway because no 1099s were filed.)

That's where I come out on this.