Symmetry is appealing in architecture, math, physics, poetry, music, art, nature, and tax law. While the US tax code may not be a work of beauty, symmetry between various sections produces the desirable result of equal tax treatment on both sides of a transaction. For example, symmetry can occur when one tax is due and another was erroneously paid. How well does symmetry fare in the face of reality?
In Chief Counsel Advice 2018-08016, an employer treated certain workers as nonemployees. The employer did not withhold payroll taxes or make payroll tax deposits on the amounts paid to the workers.
The IRS said the workers were employees, and that the employer owed both employer and employee shares of payroll taxes.
The employer wanted to use internal revenue code section 6521 (see below) to reduce the amount the IRS said the employer owed. The employer said some of the workers had already reported the compensation on their individual income tax returns and had therefore paid the related self-employment tax. The employer asked to apply the tax the employees had paid against the employee portion of the payroll tax the IRS said the employer now owed.
In this case, the statute of limitations applicable to refunding the self-employment tax was closed, but the statute on assessment of the employee portion of the payroll tax was still open.
In addition, the employer was found to have intentionally disregarded payroll tax withholding requirements. Since the worker misclassification was deliberate and not an error, the employer did not qualify for relief in the form of reduced rates and limited liability when correcting the former treatment (meaning section 3509 of the internal revenue code did not apply).
Here’s the applicable tax law provision.
From internal revenue code section 6521 – Mitigation of effect of limitation in case of related taxes under different chapters
(a) Self-employment tax and tax on wages. In the case of the tax imposed by chapter 2 (relating to tax on self-employment income) and the tax imposed by section 3101 (relating to tax on employees under the Federal Insurance Contributions Act)—
(1) If an amount is erroneously treated as self-employment income, or if an amount is erroneously treated as wages, and
(2) If the correction of the error would require an assessment of one such tax and the refund or credit of the other tax, and
(3) If at any time the correction of the error is authorized as to one such tax but is prevented as to the other tax by any law or rule of law (other than section 7122, relating to compromises),
then, if the correction authorized is made, the amount of the assessment, or the amount of the credit or refund, as the case may be, authorized as to the one tax shall be reduced by the amount of the credit or refund, or the amount of the assessment, as the case may be, which would be required with respect to such other tax for the correction of the error if such credit or refund, or such assessment, of such other tax were not prevented by any law or rule of law (other than section 7122, relating to compromises).
For purposes of subsection (a), the terms “self-employment income” and “wages” shall have the same meaning as when used in section 1402(b).
And here is what the IRS calls “clarification” of the application of section 6521.
From Revenue Ruling 86-111: [I]f 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.
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Section 6521 allows an employer to offset self-employment compensation erroneously paid by its employees against its liability for the employees’ share of FICA where section 3509 does not apply and section 6521 applies to the employees.
Because section 3509(d)(1)(C) does not render section 6521 inapplicable to the employee, it must be read to render section 6521 inapplicable to the employer. By inference, absent the applicability of section 3509, section 6521 could otherwise be applicable to the employer. Thus, where section 3509 does not apply and section 6521 applies, the employer’s liability for the tax imposed by section 3101 is reduced by the amount the employees paid as self-employment tax.
Editorial note: Section 3101 imposes Federal Insurance Contributions Act (FICA) taxes on an employee.