If you’re a recruiter who offers contract staffing services to your clients, you might have questions about a worker’s classification. In contract staffing, clients hire your workers through you, and you or another agency handle wages to the workers.
You are responsible for evaluating whether each worker is an independent contractor or employee. Do not confuse an independent contractor with someone working as a contract employee. A contract employee is someone included on your payroll whom you provide to your client for a specific period of time on a contract assignment.
Since the workers do not do work for you, classification can get muddled when you offer employer of record services. If you are unsure of a worker’s status, you need an SS-8 determination from the IRS. What is IRS Form SS-8? Before answering that question, take a look at the difference between employees and independent contractors.
Worker classification
There are some key differences between an employee and independent contractor. Firms who misclassify their workers must pay back wages and taxes, as well as penalties.
Your clients could also get in trouble if you misclassify contract workers. Make sure you understands what separates an employee from an independent contractor:
Employee
When you hire an employee for your contract staffing services, you are required to withhold taxes from their wages. These taxes include federal income tax, state and local income taxes (if applicable), and Social Security and Medicare taxes (FICA).
With FICA tax, you also contribute a matching employer portion to give to the IRS. You withhold 7.65% of the employee’s wages, and you also contribute 7.65% of their pay.
All the employee’s wages and tax deductions are reported on Form W-2. Each year, you give your employees a copy of Form W-2 so they can file their taxes.
Independent contractor
Independent contractors are not permanent employees at a company. They are self-employed workers hired to fulfill a specific task. To be classified as an independent contractor, the worker must satisfy the Department of Labor’s six economic realities.
As a recruiter, you might deal with independent contractors. When you place them with a business, they do not fulfill the same roles as a traditional employee.
An independent contractor is not included on a firm’s payroll. They do not have federal, state, and local income taxes or FICA tax withheld from their pay. Instead, independent contractors are required to pay self-employment tax to pay Social Security and Medicare taxes. You do not need to contribute taxes for their pay. The independent contractor pays the self-employment tax rate of 15.3% of their wages.
You must send an independent contractor Form 1099-MISC each year, which reports the wages paid to the worker.
What is Form SS-8?
Sometimes, it can be hard to determine whether a worker is an independent contractor or employee. If you can’t decide whether a worker is an independent contractor or employee, it’s time to file Form SS-8. Or, one of your workers might decide to file Form SS-8 if they think they have been misclassified. What is an SS-8?
Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, is filed to ask the IRS whether a worker is an employee or independent contractor.
You might be required to file Form SS-8 if one of your workers already requested a determination of status from the IRS.
Form SS-8 instructions
SS-8 is a four-page form that provides information about your recruiting firm and the worker’s responsibilities. If you file the form, you must attach supporting documentation, like Forms W-2 or 1099-MISC.
On the first page, write information like your firm’s name, address, Federal Employer Identification Number (FEIN), and phone number. The form also asks for similar information about the worker.
Part I, General Information, asks who is completing the form, the reasons for filing, and information about the worker’s job.
In Part II, Behavioral Control, you will talk about the worker’s duties in depth. For example, you need to describe the worker’s schedule, whether the worker has people helping them, and how they receive their assignments.
Part III, Financial Control, of the form talks about finances. This portion wants to know who provides supplies and equipment, how the worker is paid, and the type of expenses the worker incurs while working for the business.
Part IV, Relationship of the Worker and Firm, asks for information like benefits, how the firm introduces the worker, and termination of the worker.
The final portion of the form, Part V, For Service Providers or Salespersons, answers how the worker interacts with customers and or/leads.
Receiving SS-8 determination
The IRS will notify you whether the worker should be an independent contractor or employee. If the determination is different than the current classification, you will need to correctly classify the worker and pay back wages and taxes if necessary.
It’s better to determine the worker’s status early on. You don’t want to owe taxes for the whole year. Filing Form SS-8 will help you nip the problem in the bud.
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