Federal Employment Taxes: Employee-Independent Contractor Issues (Part 3)

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IRS Form SS-8 Determinations of Employee Status

Employers that have workers which the employer classifies as “independent contractors” (Form 1099) risk having these workers reclassified by the IRS as “employees.” This determination is a major audit area for the IRS. If the IRS does audit an employer and reclassifies “contractors” as “employees” this will subject the employer to substantial federal employment tax liabilities, penalties, and interest. The employer will also be required to treat the “reclassified” contractors as employees going forward.

A worker treated by an employer as a “contractor” may believe he or she should instead be an “employee.” IRS rules give workers a procedure to have their “contractor” or “employee” status reviewed and determined by the IRS for federal employment tax purposes.

  • A worker may file an application with the IRS requesting a determination by the IRS whether the worker should be treated as an employee for federal employment tax purposes. Form SS-8, Determination of Worker Classification Status for Purposes of Federal Employment Taxes and Income Tax Withholding, should be used by the worker for this purpose.
  • If a worker files an SS-8 with the IRS, the IRS provides the employer with an opportunity to respond, and then the IRS will issue an administrative ruling or “determination” concerning the worker’s status as employee.
  • The filing of a Form SS-8 application by a worker with the IRS is a request for an administrative ruling from the IRS as to whether the worker should be classified as an employee or independent contractor for federal employment tax purposes. An administrative ruling or letter issued by the IRS in response to a Form SS-8 application is not binding on the employer, however, and the employer is prohibited from challenging this ruling in court.[1]  If the IRS subsequently audits an employer, and then, after this examination, makes a separate examination determination that a particular worker should be treated as an employee, the employer may contest this administrative decision of the IRS in United States Tax Court.[2]  The administrative decision of the IRS concerning the worker’s status as an employee or contractor is not determined until the Tax Court’s final decision in the matter.
  • Neither the Form SS-8 determination process nor the review of any records in connection with the determination constitutes an examination (audit) of any federal tax return. If the periods under consideration have previously been examined, the Form SS-8 determination process will not constitute a reexamination under IRS reopening procedures. Because the SS-8 determination process is not an examination of any federal tax return, IRS protest/appeal rights available in connection with an examination do not apply to a Form SS-8 determination by the IRS.[3]
  • The Internal Revenue Manual, which instructs IRS examining agents, provides specific guidance in federal employment tax examinations where a prior determination letter has been issued by the IRS in response to an SS-8 application by a worker and provides:
    • If a determination letter was issued to the taxpayer, the examiner must make an independent determination whether the workers are employees or independent contractors. The determination letter by itself cannot be used as the basis for proposing additional tax based on a worker classification adjustment; and
    • The examiner may determine additional or different facts during the examination that lead the examiner to reach a conclusion that differs from the SS-8 determination. If the examiner disagrees with the SS-8 determination, the examiner will follow procedures for resolving the discrepancy and possible revocation of the determination letter.[4]

[1] B.G. Painting, Inc. v. Commissioner, T.C. Memo 2016-62; Staffmore v. Commissioner, T.C. Memo 2013-187.

[2] Id.  IRC §§ 7436(a), 7442.

[3] Instructions for Form SS-8 (Rev. May 2014).

[4] IRM 4.23.18.4.2 (Rev. 02-06-2017)

 

IRS Form SS-8 Determinations of Employee Status

Employers that have workers which the employer classifies as “independent contractors” (Form 1099) risk having these workers reclassified by the IRS as “employees.” This determination is a major audit area for the IRS. If the IRS does audit an employer and reclassifies “contractors” as “employees” this will subject the employer to substantial federal employment tax liabilities, penalties, and interest. The employer will also be required to treat the “reclassified” contractors as employees going forward.

A worker treated by an employer as a “contractor” may believe he or she should instead be an “employee.” IRS rules give workers a procedure to have their “contractor” or “employee” status reviewed and determined by the IRS for federal employment tax purposes.

  • A worker may file an application with the IRS requesting a determination by the IRS whether the worker should be treated as an employee for federal employment tax purposes. Form SS-8, Determination of Worker Classification Status for Purposes of Federal Employment Taxes and Income Tax Withholding, should be used by the worker for this purpose.
  • If a worker files an SS-8 with the IRS, the IRS provides the employer with an opportunity to respond, and then the IRS will issue an administrative ruling or “determination” concerning the worker’s status as employee.
  • The filing of a Form SS-8 application by a worker with the IRS is a request for an administrative ruling from the IRS as to whether the worker should be classified as an employee or independent contractor for federal employment tax purposes. An administrative ruling or letter issued by the IRS in response to a Form SS-8 application is not binding on the employer, however, and the employer is prohibited from challenging this ruling in court.[1]  If the IRS subsequently audits an employer, and then, after this examination, makes a separate examination determination that a particular worker should be treated as an employee, the employer may contest this administrative decision of the IRS in United States Tax Court.[2]  The administrative decision of the IRS concerning the worker’s status as an employee or contractor is not determined until the Tax Court’s final decision in the matter.
  • Neither the Form SS-8 determination process nor the review of any records in connection with the determination constitutes an examination (audit) of any federal tax return. If the periods under consideration have previously been examined, the Form SS-8 determination process will not constitute a reexamination under IRS reopening procedures. Because the SS-8 determination process is not an examination of any federal tax return, IRS protest/appeal rights available in connection with an examination do not apply to a Form SS-8 determination by the IRS.[3]
  • The Internal Revenue Manual, which instructs IRS examining agents, provides specific guidance in federal employment tax examinations where a prior determination letter has been issued by the IRS in response to an SS-8 application by a worker and provides:
    • If a determination letter was issued to the taxpayer, the examiner must make an independent determination whether the workers are employees or independent contractors. The determination letter by itself cannot be used as the basis for proposing additional tax based on a worker classification adjustment; and
    • The examiner may determine additional or different facts during the examination that lead the examiner to reach a conclusion that differs from the SS-8 determination. If the examiner disagrees with the SS-8 determination, the examiner will follow procedures for resolving the discrepancy and possible revocation of the determination letter.[4]

[1] B.G. Painting, Inc. v. Commissioner, T.C. Memo 2016-62; Staffmore v. Commissioner, T.C. Memo 2013-187.

[2] Id.  IRC §§ 7436(a), 7442.

[3] Instructions for Form SS-8 (Rev. May 2014).

[4] IRM 4.23.18.4.2 (Rev. 02-06-2017)

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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