Invalid SSNs – What To Do? (Part 1)
The new Gordian Knot for many employers
is what to do with employees with invalid Social Security Numbers (SSNs). The
ancient Gordian Knot, which legend says could not be untied, has become a
metaphor for an intractable problem. Alexander the Great allegedly solved the
problem by severing the Gordian Knot with his sword.
For many employers, a modern Gordian Knot
can arrive in the form of an inquiry from the Social Security Administration
(“SSA”) about the status of employee SSNs. These inquiries, sometimes called
“no match” letters, create a problem no swift stroke of a sword, or anything
else, will resolve easily.
This will be the first of two newsletters
on this subject. It is unlikely that new legislation will resolve the problems
discussed here.
According to The Washington Post (September
10, 2006, P. A-1), there are an estimated 12 million undocumented
immigrants in the
Many employers, particularly in certain
businesses, cannot function without Podocs. If they hire Podocs, they must pay
them, which requires an SSN. If the
Podocs get paid, they are required to pay income tax on the amounts received.
If the Podocs give the employer an
invalid SSN and the employer uses it for tax and Social Security purposes, the
employer may receive a “no match” letter from the SSA, which says that the
SSN given by the employee does not match the number on the SSA’s records.
If the employer does not withhold federal
and state taxes, plus Social Security contributions on amounts paid to
employees, the employer can be fined or even criminally prosecuted.
Less severe, but very serious is an
Internal Revenue Service (IRS) employment tax audit.
In such an audit, alleged independent contractors (here Podocs treated as
independent contractors) could be reclassified as “employees.”
If Podocs are reclassified as employees
then the employer will owe back withholding taxes on the reclassified Podocs.
Additionally, it is the practice of the IRS to give the reclassified
independent contractor Podoc (now an employee) tax and Social Security credits
representing the amounts deemed paid to an employee.
One of the many problems facing the IRS
and the SSA is how would such reclassified credits be recorded if the Podoc has
an invalid SSN?
Although many Podocs are in the country
illegally, it is possible for some of them to obtain a valid “ITIN,”
Individual Taxpayer Identification Number, which the IRS uses to record the
withholding for such individuals for tax filing purposes. Advocates of tighter
border control question this practice and allege that this is a “backdoor
way” for Podocs eventually to receive government recognition and improve their
status collectively and individually.
To avoid, or reduce, the problem with
invalid SSNs, some employers have been issuing Forms 1099 to Podoc workers who
are actually employees, effectively calling the Podoc an independent contractor.
Forms 1099 are usually given to independent contractors for services performed
like paving driveways or mowing yards.
Under current law, if someone pays an
independent contractor more than $600 per year, the independent contractor is
supposed to receive a 1099 and pay tax on the amounts received.
A 1099 allows the IRS to match the payer’s and payee’s payments and
receipts. Amounts paid pursuant to a
1099 are usually not subject to withholding for income tax and Social Security
purposes.
Some accountants have suggested that
employers issue 1099s to Podocs who clearly are not independent contractors so
that the amounts paid to Podocs are documented in some fashion.
If an invalid SSN cannot be used then perhaps the best of bad choices is
to issue a 1099. Most certainly, the
IRS and Department of Homeland Security would not approve of this practice of
issuing 1099s to erstwhile Podoc employees.
In the next issue, we will explore other
aspects of this knotty problem.
Copyright 2006
Published by the law firm of Newland & Associates, PLC
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Call us at (703) 330-0000 for a full range of business law and
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