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Form SS-8 Contractor vs Employee

Copy of a letter to a client about not holding taxes out of an employee's wages

Employee vs Independent Contractor

I understand fully why you do not want to bother about withholding taxes and want any salesman working for you to fill out the forms that will make him responsible for his own taxes. And I want to be agreeable with your every request, but this is one of those ticklish situations where if I do not speak up now and tell you that this might not be a good idea, then three or five or so years from now you might ask me, “Why in the world didn’t you tell me about that withholding requirement?”

There are very specific IRS rules about withholding and there are two things you have to worry about if you were supposed to hold out taxes but did not:

1. Here’s the scenario: The salesman signs a statement agreeing he is responsible for his own taxes. He knows that he will owe about $2,000 income tax. He goes to H&R Block or other tax preparation service. They tell him he owes $4,500. He forgot about having to pay twice the Social Security Tax. He is enraged and yells at the tax preparer. The tax preparer calls the manager. The manager wants this irate customer out of the office as soon as possible. He tells the customer that it is not the tax prepapation company’s fault. It is his employer’s fault for not holding out the tax. The customer (your employee) asks if there is anything he can do. Yes, the manager explains. Remember, the manager wants to get him out of the office as soon as possible. He tells the customer to turn you in by filling out a Form SS-8. If the IRS determines that the employer should have held out the taxes but did not, the IRS might hold the employer responsible for all taxes that should have been withheld. The written agreement is meaningless since it was in violation of IRS rules in the first place. Then the employee fills out a Form SS-8. You have problems then.

2. The other scenario that you have to think about is this: The salesman quits you and goes to work for another company. After three months he is laid off. He goes straight to the unemployment office. The unemployment office asks whom did he work for in the past year. He says you and the employer who laid him off. The state cannot find any record of you as an employer. They investigate. When the state Department of Labor finds out that you have had an employer-employee relationship for the past three or four years but did not report and pay unemployment tax, they become livid and make you pay the tax and penalties. They also automatically report the information to IRS. It gets bad.

SS-8 Questionnaire

The proper thing to do is to tell the IRS the various facts. If IRS determines that the person is an employee, then he must be treated as an employee. This is what I expect will happen, so you are no worse off.

But if they determine that the person is an independent contractor and put it in writing, then you got lucky.

Please get a Form SS-8. Fill it out and send it to the IRS.

This is a hard policy stand, but in the long run, it will save you a lot of grief.

Sincerely,

Dutch Hawkins

Copyright © - 2002 Dutch Hawkins Mandeville, LA USA - All Rights Reserved