If you received a letter from the IRS that references SS-8 determination that a worker is an employee, that could mean that you miss classified that worker as an independent contractor. The IRS letter will recommend that you amend your tax filings. What this means is that you owe back taxes for employment tax with holdings that you should have been making for that worker and/or the group of workers that are in similar positions. You may be subject to back taxes and penalties.
What’s an IRS SS-8 form?
Anyone can file a SS-8 form. An employers or workers can file a Form SS-8 (Determination of Employee Work Status for Purposes of Federal employment Taxes and Income Tax Withholding) to get a determination from the IRS as to whether or not a worker is an independent contractor. The IRS letter and SS-8 form is not an audit. It is a federal investigation into the independent contractor or employee relationship of the individual identified in the letter. Most companies are concern that is is a company wide audit. It is not. The SS-8 program issues determination letters to employers and workers on the proper classification of a worker for purposes of federal employment taxes and income tax withholding. An SS-8 technician applies the law to the facts and circumstances submitted with Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, to determine whether the worker is performing services as an employee or independent contractor. Determination letters are binding on the IRS based on the facts presented. Once a determination letter is issued, it may be modified or revoked for various reasons
Best practices when a company receives a SS-8 Form.
The best practice is to examine the company’s relationship with the worker identified by the IRS in the letter and the Form SS-8. A company should respond to the SS-8 Form. If a company does not respond, then the IRS will make its determination on employee- independent contractor status based only on information provided by the worker. Companies that ignore the SS-8 process risk having the IRS ignore important information and documents that could affect the outcome of its determination. After all, you can’t expect the IRS to know and understand your relationship with a worker unless you tell and show them documents that may affect the independent contractor determination.
Why employers should pay attention to the Form SS-8 process
Employers should pay attention to the SS-8 process and be prepared to respond in a timely manner. This is not a simple matter of filling out a form. There’s employment law considerations and documentations that should be evaluated by an employment lawyer. Failing to respond or saying the wrong things may result in an erroneous IRS determination.
This is usually done through a Letter 5367. The letter will state:
We received a request from the above-named worker to determine the correct tax status for services he or she performed for you in 2018 – 2018 .
In these types of cases, we usually give each interested party an opportunity to present a statement of the facts, since our decision will affect the employment tax status of all parties involved. Complete the enclosed Form SS-8, Determination o/Worker Status/or Purposes o/Federal Employment Taxes and Income Tax Withholding. A fill-in form is also available online at www.irs.gov/formspubs. If you want to send any other documentation, don’t send the original copy. Anything you provide becomes part of the IRS case file and won’t be returned to you.”
This means that there is a SS-8 case opened. The letter will reference your case number. You are entitled and encouraged to respond to the letter. The IRS will usually process the information they receive in the SS-8 process and then notify the employer through a determination letter.
IRS SS-8 Determination
The IRS will usually notify the employer of their determination through a Letter 4991-A. The letter informs the employer that they must pay federal income taxes and their share of Federal Insurance Contributions Act (FICA) tax (social security and Medicare tax). The IRS letter usually states as follows:
“This determination is binding on the Service, assuming there is no change in the facts or law that form the basis for the ruling. If you take a contrary position or disregard the ruling, you may be referred for audit. If you haven’t filed employment tax returns, you may need to do so. If you filed employment tax returns, you may need to amend them.
Employers generally must withhold income tax and Federal Insurance Contributions Act (FICA) tax (that is, social security and Medicare tax) from wages paid to their employees and pay these taxes to the government. Employers must also pay the employer share of FICA tax and Federal Unemployment Tax Act (FUTA) tax on the wages. To make any necessary adjustments to pay these taxes on past wages to your employees, including the use of special rates, please refer to Publication 15, (Circular E) Employer’s Tax Guide and Publication 15-A, Employer’s Supplemental Tax Guide. You can get these publications by calling 1-800-TAX-FORM (1-800-829-3676) or by visiting us online at www.irs.gov/formspubs .”
The determination package may contain a both Letter 4991, Letter 4991-A / Form 14430, and a SS-8 Determination Analysis setting forth the specific factors used in determining that the worker was an employee.
Independent Contractor and the IRS 20 Factor Test
The IRS developed the 20-Factor Test shown below to help employers evaluate whether a worker is an employee or an independent contractor. No one factor on the test is more indicative of employee status than another. If there is a high number of “yes” marks, then it will most likely indicate the presence of an employment relationship, a high number of “no” marks may or may not indicate a contractor relationship. Therefore, it is best for employers to err on the side of caution and to pursue an IRS ruling when in doubt.
The IRS uses what is considered “common law rules” to determine if a worker is an independent contractor. While you may think that this means you can use common sense to determine if a worker is an employee or an independent contractor, you would be wrong. The determination is a combination of factual consideration and legal precedents. You should retain the help of an employment lawyer who is familiar with court rulings on this issue. The common law factors referenced by the IRS takes into consideration the behavior control, financial control, and the relationships of the parties.
The IRS has developed guidelines to help the employer to correctly classify their employment relationships. There are several publications that addresses who are employees and who are independent contractors. The IRS follows the common law test for determining whether an individual is an employee for federalemployment tax purposes. Under the common law test an employer-employee relationshipexists if the person for whom services are performed has the right to control and direct a worker in results, specific details and the means by which the results are accomplished.