The Treasury Inspector General for Tax Administration (TIGTA) conducted an audit to evaluate whether the IRS’s SS-8 program is effectively processing worker determination requests and whether the rulings are being followed. TIGTA released its Report last month, but little has been written on it.
Background of Form SS-8 Process
By filing Form SS-8, a business or a worker can request a determination letter from the IRS regarding a worker’s federal employment tax status as an employee or independent contractor (IC). Form SS-8 can be filed by a worker who was classified as an IC by a business to whom the worker provided services where the worker believes that the classification is incorrect. If the IRS finds that a worker was misclassified as an IC, it can issue a binding agreement that would allow the worker to stop paying all of the employment taxes required to be paid by an IC. In that case, the worker would be responsible for paying only the employee’s part of the employment taxes and the business would be responsible for the rest. When the IRS makes a determination that a worker is an employee, it sends a letter to the business stating that it is responsible for satisfying the employment tax reporting, filing, and payment obligations that result from the determination.
The TIGTA Report
The IRS implemented a new pre-screening process in January 2012 to help process the Form SS-8 requests more efficiently. Under the new process, Forms SS-8 are reviewed upon their submission for completeness. If additional information is needed or the request does not meet the criteria for a worker determination, the requester is notified.
The SS-8 program reviewed 6,262 Forms SS-8 in FY 2012. Of these, approximately half were returned to the requester. There were fewer requests filed in 2012 than previously; the Report attributes this decrease to the IRS updating its website and clarifying the instructions on who can file a Form SS-8. However, the average number of days to process a request went from 239 days in FY 2009 to 365 days in FY 2012. To facilitate faster processing, the Report recommends that the Commissioner, Small Business/Self-Employed Division, update the Internal Revenue Manual with the new pre-screening process and the related procedures, including how the IRS will monitor to the process to ensure that it is operating efficiently.
The Report found that not all businesses are complying with the SS-8 determinations. When the IRS determines, pursuant to the filing of an SS-8 by either the worker or a business, that the worker is an employee, the IRS does not calculate the amount due and send a bill. Rather, it is the employer’s responsibility to file the correct forms to pay the taxes due. An analysis of the 5,325 closed worker SS-8 determinations showed that:
- 17% (856) of employers complied with the determination and issued one or more Form W-2s to their workers.
- 19% (940) of employers appeared not to have complied with the determination, and they issued Form 1099 instead of Form W-2. The IRS stated that 162 of those could have been granted relief under Section 530, and accordingly the Report reduced the non-compliant employers by this number and reached an estimate that 778 employers did not properly report workers as employees.
- 65% (3,294) of employers did not issue either a Form 1099 or a Form W-2. Either the workers no longer worked for the employer or the compensation was not reported to the IRS.
The Report recommends that the Commissioner, Small Business/Self-Employed Division, coordinate with the Commissioners of the Large Business and International Divisions and the Tax Exempt and Government entities Division to assess the SS-8 Program changes needed to increase employer compliance with determination rulings. The IRS has agreed with this recommendation by TIGTA.
Employers need to be aware that their workers may be filing Forms SS-8 to obtain an IRS determination of their status as employees. Workers may seek an IRS determination in order to, among other things, eliminate their self-employment taxes (i.e., only pay the employee portion of the FICA/Medicare/Social Security tax).
In many instances, the IC relationship that is the subject of an SS-8 review will be in the gray area – somewhere between a bona fide IC and common law employee. In this situation, employers may wish to enhance the likelihood of a successful response to a Form SS-8 determination (or to a tax or workforce agency audit or court challenge) by taking proactive steps to enhance their level of IC compliance.
Diagnostic and treatment tools are available to companies using ICs. The IC Compliance Scale™and48 Factors-Plus™ measure and evaluate a company’s level of IC compliance for 1099ers. Those tools are part of the IC Diagnostics™ system, as more fully described in our White Paper, which offer businesses proven means to restructure, re-document, and re-implement IC relationships to enhance compliance with federal and state IC laws.