Protecting Employers Since 1985
IRS Form SS-8 Continues To Upset And Confuse Employers Across The U.S.!
The IRS SS-8 Program allows either a Company or a Worker to request that the IRS evaluate and determine whether the Worker is an employee or an independent contractor for Federal/IRS Purposes. The resulting Determination by the IRS SS-8 Unit is just the SS-8 Unit’s “opinion” (not an actual audit!).
Either party can start the IRS SS-8 request. Most frequently, it is a disgruntled Worker who submits the request by filing an IRS Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding). The Worker claims to the IRS SS-8 Unit that he/she was misclassified by the Company and therefore should not be asked to now pay self-employment tax.
NO REQUIRED WITHHOLDINGS FOR INDEPENDENT CONTRACTORS: When the Company classifies a Worker as an independent contractor, the Company does not make any withholdings from a Worker’s paycheck as the Company would do for a W-2 employee. When a Company uses independent contractors, the Company saves money on the payroll taxes and does not have the significant cost of employee benefits like vacation pay, profit sharing plans, bonuses, overtime costs, etc. The Company usually issues an IRS Form 1099 to the independent contractor.
WITHHOLDINGS REQUIRED FOR EMPLOYEES: On the other hand, if the Company classifies a worker as a W-2 employee, the Company must withhold certain Federal income taxes, Social Security, and Medicare taxes.
Employees (as opposed to independent contractors) pay 7.65% of payroll taxes and the employer pays its 7.65% share with the total amount paid being 15.3%. Independent contractors shoulder the entire 15.3% of payroll taxes.
LEGAL CHALLENGE: Companies may face a legal challenge if the Company classifies the Worker as an independent contractor, but the Worker believes he/she is really an employee. Often this issue arises if a “terminated” independent contractor/Worker files for unemployment insurance.
Also, a disgruntled worker who is classified as an independent contractor (but believes he/she should be an employee) will sometimes contact the IRS to file an IRS Form SS-8 (which is a four page questionnaire), asking the IRS to make a determination as to whether the Worker is an employee or an independent contractor.
FILING AN IRS FORM SS-8: The IRS Form SS-8 cannot be filed anonymously. The IRS only issues determination letters based on actual real life Worker/Company relationships. The IRS SS-8 Unit evaluates real facts as described in detail by the parties.
Most companies (wisely) do not initiate an SS-8 request (most of the evaluations by the IRS SS-8 Unit find that the Worker is an employee and not an independent contractor).
WHEN A COMPANY RECEIVES AN IRS SS-8 FILED BY A WORKER: The Company can either fill out the IRS Form SS-8 or choose to not respond. It is in essence a voluntary process for both parties.
When the Company doesn’t respond, then the only information the IRS SS-8 Unit gets is from the Worker making the complaint. This of course gives the SS-8 Unit a very one- sided view of the alleged independent contractor relationship (which greatly increases the likelihood that the SS-8 Unit will find that the Worker is misclassified).
IRS FORM SS-8 DETERMINATION: After gathering detailed information, the IRS applies the law regarding independent contractor status and renders a detailed written decision called a Determination (and that written Determination will be sent to both the Company and the Worker).
This Determination letter will not request a specific amount of money to be paid or even a specific action which must be taken. It is written in a strange tone of voice which is largely in the form of a suggestion rather than a legal mandate.
SECTION 530: Companies involved in an IRS SS-8 controversy should be aware that if the Company is entitled to Section 530 of the Internal Revenue Act of 1978 (also called “Safe Haven” or “Safe Harbor”), this powerful relief is still available regardless of the legal conclusion of the IRS SS-8 Unit as announced in the Determination. When Section 530 relief is available, the IRS cannot force the Company to reclassify the affected workers to employee status.
Also be aware that neither the IRS SS-8 Determination process nor the review of any records in connection with the Determination constitutes an official IRS tax audit. Strangely there are not official procedures to appeal or protest an IRS SS-8 Unit Determination.
This is a complex legal issue. Before a Company ventures forth with a response to an IRS SS-8 request letter, consult with an experienced attorney to understand your options.
Questions?: For further information on this 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 email@example.com.
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