IRS SS-8 PROGRAM

Are you aware that an employee can seek a determination letter from the IRS regarding his status as an employee or independent contractor? Many employers know that state agencies have become increasingly reluctant to issue such determinations because it is not in their financial interest to do so; it makes it much more difficult for them to change the rules of the road, while conveniently not keeping you updated on the implications for your businesses.

A worker who has been classified by a business as an independent contractor and who believes that this classification is incorrect can petition the IRS for a ruling. If the IRS finds that the worker has indeed been misclassified, it can issue a binding agreement that would allow the worker to cease paying all of his share of employment taxes which would otherwise be attributable to the employer. He would be responsible for paying only the employee’s part of the employment taxes and, therefore, the business would be responsible for the rest. At the time of such a determination, the IRS notifies the business that it is responsible for satisfying the resultant employment tax reporting, filing and payment obligations.

The IRS program has not been terribly effective. First, approximately half of the requests filed in 2012 were returned to the requestor as incomplete. Secondly, the average processing time has been a full year! Also, under the IRS procedure, it does not send a bill to the employer for the tax due. Instead, it is the employer’s responsibility to file the correct forms and pay the taxes. Only 17 percent of employers have complied with the determination in full!

I would anticipate that this will change. The Treasury Inspector General for Tax Administration (TIGTA) has signaled that it will revise its procedures and I expect that information gathered will be forwarded to the joint enforcement task force which includes the federal and state departments of labor as well as state taxing authorities.

A request for a SS-8 review is a way in which a labor union, seeking to enter a particular business which utilizes the services of independent contractors, can take preliminary steps to enter the picture without overtly attempting to organize its workers. This potential should not be taken lightly.

However, if the SS-8 program efficiency is improved, it may be a tool that employers can utilize to obtain a predetermination of the employment tax status of a particular genre of workers. Employers should work with experienced counsel in filing SS-8 requests to insure that the information provided is complete and fairly states the nature of the business relationship.

Do you have general employment law questions? Please send them in and I will determine whether they are suitable for a blog post or require personalized consultation.