INSIGHTS & IDEAS

Caution advised in treating employees as independent contractors

The IRS has recently come out with a new Form SS-8 to determine a worker’s status for the purpose of employment and income tax withholding.  While on the face it appears to be a process whereby an employer can receive an advanced determination from the IRS on the issue of an employee’s status, it opens up the potential for those treated as independent contractors to later change their minds and have the IRS collect the unwithheld taxes (plus penalties and interest) from the now deemed employer.  From the questions submitted on the Form SS-8, the IRS will send the employee a determination letter after which the employee can file Form 8919, Uncollected Social Security Medicare Tax on Wages, with their Form 1040 and not pay the extra employment taxes normally assessed to independent contractors.

Since Form SS-8 can be filed any time within the three-year statute of limitations, former independent contractor/employees now have a financial incentive to file Form SS-8 with impunity and file amended returns to obtain substantial tax refunds.  Employers in such situations will be subjected to the additional tax, penalties and interest and have an extremely difficult time submitting documentation to reverse the IRS’s determination.