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Tips for a Business Suddenly Hit with an IRS SS-8 Request
The IRS Form SS-8 has been used for decades by the IRS and is often sent to a company when a disgruntled independent contractor complains to the IRS that he/she was really an employee (and was misclassified by the company).
The IRS Form SS-8 is entitled “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.” You can easily find it online.
The IRS Form SS-8 is four pages loaded with many tough questions about the alleged independent contractor relationship. Throughout IRS Form SS-8, the company (who is hit with the SS-8 form) is called the “Firm” and the independent contractor at issue is called the “Worker”. (The term “Worker” is a supposedly neutral term for an independent contractor whose classification is now in dispute.)
FACTUAL QUESTIONS: Both the Firm and the Worker are sent the exact same four page form (IRS Form SS-8) to fill out. Some of the questions are essentially factual such as: “Total number of workers who performed or are performing the same or similar services.”
TRICKY QUESTIONS: Almost every question on the SS-8 could be interpreted and answered in different ways. Companies will often put down answers which unwittingly destroy independent contractor status because the quick honest answer is not always the more complete answer as far as independent contractor status is concerned. Therefore, use an experienced attorney to assist with the answers to all questions on the SS-8.
An example of a tricky question is: “Can the relationship be terminated by either party without incurring liability or penalty?
Many think the correct answer to support independent contractor status is “yes”-because “yes” shows the lack of control by the company over the independent contractor. However, the correct answer to support independent contractor status is: “No, the independent contractor cannot quit at any time without incurring liability because the independent contractor is under a contract with the company and could incur liability if the independent contractor simply walks away from its responsibilities under the contract.”
FIRM AND WORKER USUALLY HAVE DIFFERENT RESPONSES: The IRS SS-8 Unit requests that both the Firm and the Worker fill out the IRS Form SS-8 from their own points of view. Not surprisingly, each party usually has a radically different set of responses to the four pages of questions.
For example, in Part II, Question 3 asks: “Who determines the methods by which the assignments are performed?”, the Worker may say “the Firm instructs me as to what methods to use,” and the Firm may say “The Worker is solely responsible for determining the method and means of performance.”
IRS SS-8 UNIT EVAULATES THE COMPLETED FORMS: Once the IRS SS-8 Unit receives the SS-8 Form from each party, the IRS considers and evaluates the two SS-8 Forms and decides whether the alleged independent contractor relationship was classified correctly as an independent contractor or misclassified (and should have been classified as an employee). The parties usually wait many months for an answer to come in the mail from the IRS SS-8 Unit.
Note that if either party (the Firm or the Worker) fails to submit a filled out SS-8 Form to the IRS SS-8 Unit, the IRS SS-8 Unit will make its determination of worker status (i.e., independent contractor or employee) based on the SS-8 Form it received.
Submitting an IRS SS-8 Form is essentially voluntary for both parties (Firm and Worker), but it is not wise for the Firm to ignore the request for information from the IRS SS-8 Unit because then only half the factors will be used for the IRS SS-8 Unit to make its ultimate decision on worker status.
DETERMINATION & ANALYSIS: Once the SS-8 Unit completes its investigation, it eventually mails a Determination Analysis to both parties. It is many pages of information including a summary of the facts, a summary of the law, and the reasoning for the classification decision. The Determination Analysis usually finds more than 90% of the time!! (not surprisingly) that the worker was misclassified as an independent contractor and really should have been classified by the Firm as an employee.
Once the Company receives a Determination Analysis from the SS-8 Unit which tells the Company that the Company (supposedly!) made a mistake in classifying the worker as an independent contractor, disappointment and panic often ensues at the Company.
The Company and I read over the Determination Analysis together, and we discuss what the next best appropriate steps are. Sometimes the Company decides to start treating independent contractors (such as the one who was the subject of the SS-8 request) as employees. Sometimes the Company decides to continue with independent contractor status, but the Company carefully restructures the independent contractor relationship. There may even be other options.
The important thing to realize about an IRS SS-8 Determination Analysis is that it is simply an opinion letter. It is not a tax bill. There is no amount of money that is specified by the IRS that the Company now owes, and there is no due date for any kind of payment to be made. Amazingly, there is also no appeal process.
CAUTION!: The Company should also consider whether or not it has Section 530 Safe Haven protection (a powerful legal defense against any IRS legal challenge which might be jeopardized by reclassification of an independent contractor to employee status). With all legal defenses in mind, the Company should take well thought out steps, with the guidance of experienced legal counsel, to strengthen independent contractor status.
Questions?: For further information on this complex issue and various strategy steps to take in the face of such an IRS request or any independent contractor questions or concerns, please contact Attorney Nancy Joerg at Wessels Sherman’s St. Charles, Illinois office: 630-377-1554 or email her at firstname.lastname@example.org.
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