Under the Internal Revenue Code, employers must withhold federal income tax as well as social security tax from the wages they pay to employees. In addition, employers must pay social security and unemployment taxes on behalf of their employees. “These taxes are known collectively as ’employment taxes.'” Greco v. IRS, 380 F. Supp. 2d 598, 613 (M.D. Pa. 2005).
Employers do not withhold and pay these employment taxes for independent contractors. See id. “In connection with payments to ‘independent contractors,’ employers only have to send annual information returns, on Form 1099 to the workers and on [a] Form 1099 to the IRS, indicating the income paid [to the independent contractor] during the year.” Id. “In light of these tax consequences, [the] proper characterization of the employment relationship is vital.” Halfhill v. United States IRS, 927 F. Supp. 171, 174-75 (W.D. Pa. 1996). If an “employee” is “knowingly” misclassified, it could be the basis for an IRS Whistleblower Complaint or Form 211.
Internal Revenue Code Definition of “Employee”
Section 3121(d)(2) provides that for FICA tax purposes the term “employee” includes any individual who has the status of an employee under common law. With certain exceptions not relevant here, the section 3121(d) definition of “employee” also applies for FUTA tax purposes. Sec. 3306(i). The IRS regulations state that the term “employee” includes “every individual performing services if the relationship between him and the person for whom he performs such services is the legal relationship of employer and employee.” Sec. 31.3401(c)-1(a), Employment Tax Regs. Guides for determining employment status are found in the following three substantially similar sections of the Employment Tax Regulations: sections 31.3121 (d)-1 (c); 31.3306 (i)-1; and 31.3401 (c)-1.
These sections provide that generally the relationship of employer and employee exists when the person or persons for whom the services are performed have the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what shall be done but as to how it shall be done. In this connection, it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if the employer has the right to do so.
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 Congress has imposed social security taxes on the employer and employee under the Federal Insurance Contribution Act (FICA), 26 U.S.C. § 3101, et seq., and unemployment insurance taxes on the employer under the Federal Unemployment Tax Act (FUTA). See 26 U.S.C. § 3301, et seq. See also Joseph M. Grey Pub. Accountant, P.C. v. Commissioner, 119 T.C. 121, 126 (2002), affd. 93 Fed. Appx. 473, 2004 U.S. App. LEXIS 6662 (3d Cir. 2004).
 Form 1099 is required when the “salaries, wages, commissions, fees, and other forms of compensation for services rendered aggregates $600 or more.” 26 C.F.R. § 1.6041-1(a)(1)(i).
 Section 3121(d)(2) defines an employee as “any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee.” See also sec. 3306(i).