The Answers to the Top Ten Employer Questions

When a company uses independent contractors, it is not unusual for the Company to suddenly get a letter from the IRS that a current or former worker has submitted an IRS Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding).

IRS FORM SS-8 IS FILED: The IRS Form SS-8 inquiry can be triggered by either a worker/independent contractor or by the Company for whom the worker performs services. Either party can start the inquiry.

If the Company submits the Form SS-8 to the IRS, it is usually because the Company wants official confirmation by the IRS that independent contractors are being properly classified as independent contractors by the Company for purposes of Federal income tax withholding and employment taxes.

However, the IRS Form SS-8 is most often submitted to the IRS by a disgruntled former independent contractor (who is now loudly claiming that he/she was misclassified by the Company and therefore should not be asked to now pay self-employment tax).

IRS ACKNOWLEDGES RECEIPT AND SENDS BLANK SS-8 FORMS TO PARTIES FOR COMPLETION: The IRS attempts to get very detailed information from all parties involved by sending those parties blank Forms SS-8 for completion. The Company is always informed of the disgruntled independent contractor’s identity. It is not held secret.

The IRS will then review the responses on the Form SS-8 from both the worker and the Company. Next, the IRS applies the law regarding independent contractor status and renders a very long and detailed written decision called a Determination (and that written Determination will be sent to both the Company and the worker).

This is of course a very nerve wracking, anxiety producing experience for the Company under scrutiny by the IRS SS-8 Unit. The Company generally has many questions it wants to think over before filling out and submitting the four pages of the IRS Form SS-8 to the IRS.

The following are the ten most frequently asked client questions about this IRS SS-8 issue:

Question 1: If the Company had a written independent contractor agreement signed and dated by the independent contractor, is that enough to establish an independent contractor relationship in the eyes of the IRS?

Answer: No

Question 2: Does the IRS Form SS-8 Determination letter constitute an audit for purposes of a Federal tax return?

Answer: No

Question 3: Are there any appeal rights available in connection with an IRS Form SS-8 Determination letter?

Answer: No. Surprisingly, there is no procedure of any kind to appeal the IRS Form SS-8 Determination letter reclassifying workers to employee status.

Question 4: Does an IRS Form SS-8 Determination letter affect the Company’s IRS Section 530 safe haven protections?

Answer: No

Question 5: Does the IRS ask for a dollar assessment from companies who are found to have misclassified their independent contractors under a Determination letter from the IRS SS-8 Unit?

Answer: No

Question 6: If either party (the Company or the worker) fails to submit a filled out IRS Form SS-8, does the IRS SS-8 Unit still go ahead and make a determination based on only one of the parties’ filled out SS-8 forms?

Answer: Yes

Question 7: Does the IRS issue a Determination letter on worker status for proposed classification situations or hypothetical situations?

Answer: No. The IRS only issues determination letters based on actual worker/company relationships. The IRS SS-8 Unit evaluates real facts as described by the parties.

Question 8: What is the purpose of the IRS Form SS-8?

Answer: By having the parties answer many specific factual questions (there are four pages of questions), the IRS SS-8 Unit is hoping to properly evaluate whether the working relationship is employer/employee or Company/independent contractor.

Question 9: Should a Company seek legal advice before filling out and submitting the IRS Form SS-8, even when the Company is secure in its knowledge that the independent contractor relationship is proper?

Answer: Yes, it is always wise to work with an attorney who is very familiar with the IRS perspective on independent contractor status. The questions on the IRS Form SS-8 are phrased in a way which can be very confusing. Each word counts.

Question 10: What do I do if my Company receives a Determination letter from the IRS SS-8 Unit finding that the workers at issue are misclassified independent contractors and are really employees in the eyes of the IRS SS-8 Unit?

Answer: You have several options ranging from reclassifying the worker(s) to employee status; restructuring the independent contractor relationship; or ignoring the Determination if it is based on erroneous facts.

You also have the option of relying on IRS Section 530 safe haven status if an experienced attorney tells you that you likely have that legal protection. Do not make this important legal decision without the advice of an experienced attorney in this area.

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 najoerg@wesselssherman.com.