November 2013

By: Nancy E. Joerg, Esq.

Over the years, I have had many clients of all types (trucking companies, sales organizations, dental clinics, limousine companies, messenger/courier companies, architectural firms, flooring companies, construction companies, soccer camps, music schools and dozens of other kinds of companies) anxiously contacting me when they suddenly receive an IRS Form SS-8 in the mail.

The IRS Form SS-8 is entitled “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.” The IRS Form SS-8 is an intimidating document. First of all, it arrives out of the blue from the IRS. The IRS explains in its cover letter to the IRS Form SS-8 that the company is being asked to fill out the IRS Form SS-8 because a “worker” (i.e., disgruntled independent contractor) has requested that the IRS investigate that worker’s status.

For purposes of making this article easier to understand, let’s call the “worker” Steven Jones. Let’s call the “firm” Best Flooring.

Best Flooring never expects to receive an IRS Form SS-8 in the mail. Once it comes, they are understandably a bit rattled. They really don’t know which way to turn. When they calm down and actually look at the multi-page IRS Form SS-8, they are even more upset. They see it contains difficult factual questions about Best Flooring’s independent contractor relationship with Steven Jones.

Best Flooring might feel, with ample justification, that the many questions on the IRS Form SS-8 do not “fit” their actual independent contractor relationship with Steven Jones. How can Best Flooring answer questions which seem off base in terms of the actual independent contractor relationship between Best Flooring and Steven Jones?

My experience has been that companies like Best Flooring also feel angry because they have entered into a written independent contractor agreement with Steven Jones and feel that Steven Jones has “gone back on the deal” as originally entered into when they first started doing business with Steven Jones.

When I get a phone call from a company like Best Flooring, I explain the basics about what the IRS Form SS-8 is, how they can best respond to an SS-8 request, and what are the long-term implications of the IRS Form SS-8 process.

NOT AN IRS AUDIT: The first thing to realize about the IRS Form SS-8 process is that it is not an IRS audit. It is simply an investigation into the independent contractor relationship (in our example, the independent contractor relationship between Best Flooring and Steven Jones).

It is not a company-wide audit. Rather, it is an inquiry into the specific working relationshipbetween Best Flooring and Steven Jones.

TERMINOLOGY IS HARD TO UNDERSTAND: The IRS Form SS-8 is a difficult form to fill out (it is very much like the Illinois Department of Employment Security Worker Relationship Questionnaire which also looks into the viability and legality of the independent contractor relationship at issue).

In filling out the IRS Form SS-8, the first thing that Best Flooring must know is the meaning of the awkward terminology.

In the IRS Form SS-8, the company, in this example Best Flooring, is called “the firm.”

The independent contractor, Steven Jones a flooring installer, is called “worker.” I have many clients complain that the word worker already makes the independent contractor sound like an employee, but the IRS and state governmental bodies have used the term “worker” as a supposedly neutral term for decades (in deciding whether or not an individual is an employee or independent contractor of the particular company under investigation).

Any company attempting to fill out the IRS form SS-8 should immediately seek experienced legal counsel. These questions are tricky, poorly phrased, and there are many “terms of art” throughout this questionnaire that the average person would not begin to understand.

IT IS BEST TO RESPOND TO THE SS-8 FORM: If Best Flooring chooses not to respond to the IRS Form SS-8 at all, then the IRS will make its determination as to the worker status of Steven Jones based upon information from Steven Jones only. If a company chooses not to respond to the IRS Form SS-8 at all, this will not stop the IRS from making a determination. The IRS will just issue a determination based on one-sided information – that of Steven Jones.

So, it is to the benefit of the company to actually participate in the IRS Form SS-8 process and put forward its best, most persuasive information on why Steven Jones is an independent contractor (and not an employee) of Best Flooring.

Documents such as an independent contractor agreement which supports independent contractor status (this needs to be evaluated by an experienced attorney), business cards in the name of the independent contractor, invoices in the name of the independent contractor, promotional materials in the name of the independent contractor, a website in the name of the independent contractor, etc. should be attached to the IRS Form SS-8 before it is submitted to the IRS. Sometimes an actual letter to the IRS in addition to filling out the IRS Form SS-8 is an excellent strategy.

SECTION 530 SAFE HAVEN: Another important issue to address in a cover letter to the IRS for a company filling out the IRS Form SS-8 is possible mention of Section 530 of the Revenue Act of 1978, also called Section 530 Safe Haven Safe Harbor.

If a company, like Best Flooring, has had, for example, a prior IRS audit and passed it on the issue of the independent contractor status of their flooring installers, then of course Best Flooring should mention that in its cover letter to the IRS (when it sends in its completed IRS Form SS-8).

Once the IRS realizes that Best Flooring has a strong Section 530 Safe Haven defense, it will be much less likely to use the IRS Form SS-8 response as a future lead for an actual IRS audit of Best Flooring. Although the IRS does not routinely follow up its Form SS-8 inquiry with an actual IRS audit, occasionally an IRS Form SS-8 situation leads to an IRS audit. Therefore, it is extremely wise for a company to explain in its cover letter to the SS-8 Form why it would qualify for Section 530 protection. The Section 530 defense could well be taken into account by the IRS in determining whether or not to refer the independent contractor controversy for company wide audit by the IRS.

DETERMINATION OF WORKER STATUS: After Best Flooring has filled out the IRS Form SS-8 and has sent it in to the IRS, then Best Flooring simply waits for a response from the IRS. It may take many months before a written response actually comes to Best Flooring from the IRS.

When Best Flooring eventually gets the written decision – called a Determination of Worker Status from the IRS (as a result of Best Flooring having sent in the IRS form SS-8 months before) – the determination is extremely detailed, usually in the neighborhood of ten type-written pages. Much of the determination is a summary of the facts as submitted to the IRS (based on the SS-8 form filled out by the worker and the SS-8 form filled out by the company).

Of course, Best Flooring will have vastly different answers on its IRS Form SS-8 than will Steven Jones. The IRS has to take these different factual accounts of the independent contractor relationship and make a determination as to whether or not Steven Jones is, in fact, an independent contractor or an employee. Usually the IRS decides that the Steven Jones of the world are in fact employees. It is somewhat rare to get a determination in which the company has won and the IRS agrees that the worker at issue is in fact an independent contractor.

Depending on the nature of the IRS determination that comes in the mail, the company may or may not want to alter its independent contractor relationship (modify its independent contractor agreement, restructure its independent contractor relationships, etc). Here again, experienced legal counsel is an absolute must.

For a free copy of IRS Form SS-8, contact Wessels Sherman Legal Assistant Tammy Nelson at 630-377-1554 or via email at: tanelson@wesselssherman.com.

Questions? Call Attorney Nancy E. Joerg of Wessels Sherman’s St. Charles, Illinois office: 630-377-1554 or email her at najoerg@wesselssherman.com.