You can face a serious crisis if you do not know the difference between an employee and independent contractor and misclassify your workers. Our Award Winning New York Misclassification Lawyer has educated companies and employees on legal issues affecting both sides of the working relationship.
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. The federal and state government have increased their efforts to crackdown on misclassification cases. Today’s blog post will discuss the IRS’ SS-8 Program (i.e., The Determination of Worker Status Program), which enables a company or a worker to request that the agency issue a determination letter stating whether an employee or an independent contractor for federal purposes. This determination can have significant tax implications for the worker and company and can cause a number of other issues for the company. It is important to get experienced employment law counsel from the outset because of the severity of the potential ramifications including class-wide claims in other forums.
When a company treats a worker as an independent contractor, they do not make any withholdings or payroll deductions from a worker’s payments but they do issue a 1099 tax form. If a company treats a worker as an employee, it withholds certain federal income taxes, Social Security and Medicare taxes and pay the employer’s share of the taxes. Specifically, employees pay 7.65% of payroll taxes and employers pay the same for its share with total amount paid being 15.3%. In general, an independent contractor pays both parts alone — 15.3%. Saving on these payroll taxes and not providing employee benefits (e.g., vacation pay, participation in health plans, profit sharing plans and bonus plans, protection under certain employment discrimination laws) are two of the biggest reasons why companies may misclassify its workers. Other companies can encounter a misclassification inquiry due to an innocent error where the company and worker erroneously agreed to a contractor designation. This can come back to bite the company when the worker files for unemployment or seeks a determination under the SS-8 program.
Either the company or the worker can request a worker classification determination under the SS-8 program. The key takeaway is that the form cannot be filed anonymously. The complainant must reveal her or her identity. This can be a concern for some workers who are fearful of retaliation. If a worker is aware of tax fraud and is concerned about anonymity, he or she should contact an experienced employment lawyer to learn potential options, which may enable anonymous complaints.
You might be wondering – why would a company file a request for a determination under this program? Companies may request a determination before they undertake hiring a large class of workers where the liability can be significant in misclassification cases. Proactive measures can save companies from a legal nightmare so an initial determination can be valuable. That being said, most companies do not request a determination.
If a company receives a notice from the IRS, it can be a panic inducing experience and lead to inaction. While it may tempting to ignore the notice and hope that the matter will go away, that can only cause more harm because the IRS will make a determination based on the one-sided information provided by the worker. That is not an ideal scenario for obvious reasons. In general, an SS-8 complaint is filed by a disgruntled former worker, who believes he or she was treated unfairly. This may come after or in conjunction with a claim for unemployment insurance benefits with the Department of Labor as well.
The most important step is the first step. An early misstep can be costly and irreversible. Companies should not answer or respond to the form without seeking experienced employment law counsel. You should do an internal audit and determine if you have implemented best practices regarding your workforce. The IRS will request that the company provide detailed factual information regarding the worker’s relationship with the Company. It is critical to understand the law and how it relates to the questions and your circumstances. It is advisable to have your attorney prepare your responses and the overall presentation. You want to put forth your strongest position.
Although the complaint is a one-off issue, depending on the circumstances, it can lead to further inquiry if additional misclassification issues are identified. Sometimes, a company can innocently volunteer additional information, which can lead to further inquiry. Experienced legal counsel may help you work to limit the scope of the inquiry, which should be limited to the complaint.
The IRS will issue a detailed Determination of Worker Status after receiving information from the worker and the Company. It can take several months for the IRS to complete its determination process.
The Determination may lead to changes in your classification of workers or confirm your practices. It can have domino consequences in other legal forums including the filing of a class action lawsuit against the Company. If you have received an SS-8 form and have questions about misclassification matters, contact our Award Winning New York Employment Lawyer at (800) 893-9645 and learn your rights and options.
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