If you are a business owner, you are already aware of the need to properly classify workers as either employees or independent contractors for tax purposes. However, this task is often easier said than done. Despite the issuance of various guidelines and court rulings, it isn’t always clear or simple to determine how a worker should be classified – which is precisely where an IRS document called Form SS-8 may help. However, while filing Form SS-8 can provide answers to critical questions about worker classification, submitting this form can also be risky, potentially opening the door to an audit. If you are an independent contractor or business owner in California – or if you are concerned about a worker classification tax audit – consult with the Roseville small business accountants of Cook CPA Group for help with employment tax compliance. Our business accounting firm provides a wide range of business tax services in California.
Worker Classification: Taxes for Independent Contractors vs. Employees
Independent contractors and employees are both considered workers. However, they are treated differently for tax purposes, as our business tax preparers discussed in a previous article on independent contractor taxes. As far as employers are concerned, the primary difference is the responsibility to withhold, match, and remit various employment taxes, such as Medicare and Social Security taxes, from employees’ earnings. In comparison, independent contractors – who receive not Form W-2 like employees, but Form 1099-MISC – are responsible for determining and paying self-employment tax.
Employers sometimes misclassify employees as independent contractors on purpose, as doing so enables the employer to save money – at least in the short term – by avoiding the payment of unemployment taxes, which is a form of tax evasion. It also allows employers to avoid paying the cost of various employee benefits. However, this is not a wise or business savvy path for an employer to follow. Intentionally misclassifying employees is illegal, and can therefore lead to severe penalties. These penalties may include fees, fines, interest, back taxes, and potentially even prison time.
What is the Purpose of Form SS-8?
The Internal Revenue Service has issued various guidelines to assist employers with worker classification. More recently, courts have issued important rulings on this subject, such as the California Supreme Court’s decision in Dynamex Operations West v. Superior Court of Los Angeles (2018) to establish three new criteria for worker classification in California.
Despite these guidelines, it can still be difficult to determine a given worker’s status, which must be carefully evaluated on a case-by-case basis. In situations where an employer cannot determine how a worker should be classified, the employer has the option of filing Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding).
As its title makes clear, Form SS-8 is used by the IRS to determine how workers should be classified in cases where the employer is uncertain. However, before filing Form SS-8 with the IRS, there’s a potential risk factor to keep in mind: submitting the form could cause the IRS to probe deeper into your business records, possibly leading to an audit. Since each case is unique and calls for a different approach, it is wise for employers to seek professional tax services before contacting the IRS.
What Happens if One of My Workers Files Form SS-8 with the IRS?
Form SS-8 is not just for business owners. As an employer, it’s important for you to be aware that your workers also have the right to file Form SS-8. For example, a worker may decide to take matters into their own hands and file the form if they feel they have been denied rightful benefits – or have been forced to pay more in taxes – due to an improper classification.
You will be contacted by the IRS if one of your workers files Form SS-8. Specifically, the IRS should send your company written notification that identifies the worker who submitted the form. The letter will also include a blank copy of Form SS-8, which you as the employer will be required to complete and submit. The IRS will then evaluate the materials to issue a determination.
You may be asked to submit additional documentation to assist with this process. As noted by the IRS in the instructions for Form SS-8, “The technician [assigned to the case] may ask for additional information from the requestor, from other involved parties, or from third parties that could help clarify the work relationship before rendering a decision.”
California Small Business Tax Accountants Serving Roseville and Sacramento
If you have questions about worker classification and employment tax compliance – or if you have been contacted by the IRS because one of your workers recently submitted Form SS-8 – it is in your best interests to discuss the situation with an experienced business tax accountant. For a free consultation about California or federal employment taxes, contact Cook CPA Group online, or call us today at (916) 724-1665. We serve small to midsize businesses in all types of industries throughout the Roseville and Sacramento regions.