Form SS-8 May Help Solve Problems with IRS
You can face serious consequences if you do not know the difference between an employee and independent contractor and misclassify your workers. Business & Financial Solutions has educated companies and employees on the issues affecting both sides of the working relationship, thereby helping to prevent and/or solve unnecessary tax problems. Form SS-8 is used by individuals and firms to request a determination of the status of a worker under the common law rules for purposes of federal employment taxes and income tax withholding.
Many businesses have workers who may be classified incorrectly. Many of these workers have filed for SS-8, often in the form of a complaint, in order to resolve self-employment tax issues, as a result a misclassification of work status. Usually this misclassification happens when workers are classified as independent contractors, but the workers may be employees instead. It is important to know whether a worker is an employee or an independent contractor, mainly because of payroll taxes.
Some employers prefer to classify workers as independent contractors to lower costs, even if it means less control over a worker’s day-to-day activities. But the government is cracking down on businesses that classify workers as independent contractors to reduce taxes or avoid their health insurance obligations under the Affordable Care Act (ACA). The IRS believes that millions of workers have been misclassified as independent contractors instead of as employees and in doing so the government has been denied substantial payment of employment-related taxes.
Here are seven things every business owner should know about hiring people as independent contractors versus hiring them as employees.
The IRS uses three characteristics to determine the relationship between businesses and workers:
Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.
Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.
Type of Relationship factor relates to how the workers and the business owner perceive their relationship.
If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.
If you can direct or control only the result of the work done, and not the means and methods of accomplishing the result, then your workers are probably independent contractors.
Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.
Workers can avoid higher tax bills and lost benefits if they know their proper status.
Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding,with the IRS.
You can learn more about the critical determination of a worker’s status as an Independent Contractor or Employee at IRS.gov by selecting the Small Business link. Additional resources include IRS Publication 15-A, Employer’s Supplemental Tax Guide, Publication 1779,Independent Contractor or Employee, and Publication 1976,
Larry Simmons is the President & CEO for Business & Financial Solutions. He holds an undergraduate degree in accounting, with a minor in computer technology. Mr. Simmons also holds, from Auburn University, an MBA in Finance. Before founding Business & Financial Solutions in 2002, Mr. Simmons worked for Deloitte and Touché as the...