US Treasury SS-8 Determination of Worker Status for Purposes of Federal Employment Tax - John R. Dundon II, Enrolled Agent
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US Treasury SS-8 Determination of Worker Status for Purposes of Federal Employment Tax

Business Entity Selection and the Tax Consequences of Converting

US Treasury SS-8 Determination of Worker Status for Purposes of Federal Employment Tax

In my dealings with the US Treasury Department regarding worker classification disputes I have learned that although in reality there may be shades of gray distinguishing between what constitutes an employee and what constitutes an independent contractor the US Treasury has some very specific positions.  Here are four that will hopefully help you make the correct determination and avoid future problems:

1. A relationship between an employer and an employee exists when the person for whom the services are performed has the right to control and direct the individual who performs the services, not only as to what is to be done, but also how it is to be done.  It is not necessary that the employer actually direct or control the individual, it is sufficient that the employer merely has the right to do so. The designation of a worker as an agent, sub-contractor or independent contractor is irrelevant if the relationship of employer and employee exists.  The degree of importance of each factor varies depending on the occupation and the factual context in which the services are performed.

2. A worker who is required to comply with another person’s instructions about when, where and how he or she is to work is ordinarily an employee.  This control factor is present if the person or persons for whom the services are performed have the right to require compliance with instructions.  Some employees may work without receiving instructions because they are highly proficient and conscientious workers or because the duties are so simple or familiar to them.  Furthermore, instructions, that show how to reach the desired results, may have been oral and given only once at the beginning of the relationship.

3. Lack of significant investment by a person in facilities or equipment used in performing services for another indicates dependence on the employer and, accordingly, the existence of an employer-employee relationship.  The term “significant investment” does not include tools, instruments, and clothing commonly provided by employees in their trade; nor does it include education, experience or training.

4. A person who can realize a profit or suffer a loss as a result of his or her services is generally an independent contractor, while the person who cannot is an employee.  “Profit or loss” implies the use of capital by a person in an independent business of his or her own.  The risk that a worker will not receive payment for his or her services, however, is common to both independent contractors and employees and, thus, does not constitute a sufficient economic risk to support treatment as an independent contractor. If a worker loses payment from the firm’s customer for poor work, the firm shares the risk of such loss. Control of the firm over the worker would be necessary in order to reduce the risk of financial loss to the firm. The opportunity for higher earnings or of gain or loss from a commission arrangement is not considered profit or loss.