A recent report released by the Treasury Inspector General For Taxpayer Administration (“TIGTA”) titled “Employers Do Not Always Follow Internal Revenue Service Worker Determination Rulings” serves as a reminder to employers that in addition to the United States Department of Labor’s continuing interest in employer misclassification of employees as independent contractors, the Internal Revenue Service is stepping up enforcement efforts as well.

The report resulted from an audit of the IRS Determination of Worker Status Program, known as the SS-8 Program. The SS-8 Program allows for employers or workers to request the IRS to make a determination of whether a worker is an employee or independent contractor. 

It comes as no surprise that, according to the report, 90% of SS-8 requests are made by workers. The SS-8 Form, which can be downloaded at the IRS website, www.irs.gov, asks a series of detailed questions centering around the areas of behavioral control, financial control, and the relationship between the worker and the business.

The audit found that the SS-8 Program has grown in terms of the number of cases over the last several years, resulting in lengthy processing times. The audit also found that employer adherence to the SS-8 determinations has been limited. As a result of the audit findings, the TIGTA made recommendations to the IRS regarding improvement of processing times and to implement a task force to improve enforcement of the determinations.

The IRS does have a Voluntary Classification Settlement Program for employers who qualify. In order to qualify, an employer must be treating workers as independent contractors and have consistently so treated the workers, including using 1099s. The employer cannot currently be subject to an IRS audit on payroll tax issues, or under audit by the DOL or any state agency for misclassification of workers. The employer cannot currently be subject to a court action contesting classification of workers. Under the Settlement Program, the employer files a Form 8952 with the IRS at least 60 days before starting to treat workers as employees, and must pay the IRS the equivalent of approximately 1% of affected workers’ pay over the past year.

Bottom line, if you have not done so already, you should take a careful look at any independent contractor relationships your company has or wants to enter into, and carefully evaluate whether the independent contractor should really be an employee. Because, if it looks like a duck, swims like a duck, and quacks like a duck, the IRS will say it’s a duck!