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Independent Contractor vs Employee – IRS Issues New Rulings


Independent Contractor vs Employee

Independent contractor status for Workers Compensation is one of the most discussed topics I have come across lately. Have the rules changed that much over the last few years? Check these links for a few articles I had written in the past on subcontractors, ladder of insurance, IRS rules on independent contractors.

Picture Of Gavel Independent Contractor In The Court

The following two cases are tax rulings. These are not Workers Comp rulings. They are great discussion points. The IRS recently published the following info:

New Rulings Issued on Employee vs. Independent Contractor

The U.S. Tax Court has issued two new rulings on whether workers should be classified as employees or independent contractors.

The Law

In both rulings, the Tax Court said that whether an individual should be classified as an independent contractor or an employee is a question of fact. Common (case) law rules are applied to determine whether an individual is an employee or an independent contractor.

Picture Of Judge Independent Contractor Sitting On Court

In the new rulings, the Tax Court considered the following factors in determining whether workers were employees or independent contractors:

(1) the degree of control exercised by the employer;

(2) who invested in the work facilities used by the worker;

(3) the opportunity of the worker for profit or loss;

(4) whether the employer can discharge the worker;

(5) whether the work performed is an integral part of the employer’s regular business;

(6) the permanency of the relationship between the parties;

(7) the relationship the parties believed they were creating;

(8) whether employee benefits were provided to the worker [Reg. § 31.3121(d)-1(c)(2); Reg. § 31.3401(c)-1(b)].

The Tax Court noted that the list of factors above is not exclusive, and other factors may be considered in this analysis.

First Ruling

Picture of Judge hand holding Gavel Independent Contractor First Ruling Concept
(c) 123rf.com

In Keller v. Commissioner, TC Memo 2012-62, 3/8/12, the Tax Court ruled that an auto body shop employer incorrectly classified three of its 10 workers as independent contractors.

Two of the three workers performed secretarial duties for the auto body shop (e.g., serving as a receptionist, answering the phones, and filing).

The other employee, Eric Mark, started out by cleaning the shop and assisting other workers at the auto body shop, and then moved up to writing estimates for repairs. Mark received on-the-job training from the owner of the company and other technicians at the auto body shop. The three employees were paid weekly by check.

The Tax Court said that the evidence appeared to show that the employer had the right to control the three workers’ work, and the employer did not prove that he did not control their work.

Accordingly, this factor weighs heavily in favor of employee status for these workers. Other factors that supported a finding of employee status included:

(i) the workers did not provide their own equipment;

(ii) there was no evidence that the workers had an opportunity for profit or loss; and

(iii) the employer could terminate the workers at will.

Section 530 of the Revenue Act of 1978, as amended, provides employers with protection from employment tax assessments even though they incorrectly classified a worker as an independent contractor if they meet the following three requirements:

(1) reasonable basis,

(2) substantive consistency, and

(3) reporting consistency.

The employer, however, did not qualify for Section 530 relief because it failed to meet the reporting consistency requirement, as it had not filed Forms 1099-MISC, Miscellaneous Income, for any of the workers in question, which is required under Code Sec. 6041(a) and Code Sec. 6041A(a). The employer needed to file something – either a W-2 or a 1099-Misc.

Employment Tax Penalties

Emoticons Tight on Big Red TAX Letter Independent Contractor Tax Penalties Concept
(c) 123rf.com

The Tax Court recommended that the employer be subject to employment tax penalties under Code Sec. 6651(a)(1) and Code Sec. 6656(a) for failing to make required employment tax deposits with respect to the three workers who were found to be employees and to timely remit the tax and file employment tax returns with the IRS.

The Tax Court ruled that the other seven workers should be classified as independent contractors based on its review of the above eight factors. What I find odd here is the press release did not comment on the other seven workers and their statuses. This would have been very helpful.

Second Ruling

Man Independent Contractor Showing Tax Papers

In Dean Cibotti, et ux. v. Commissioner, TC Summary Opinion 2012-21, 3/6/12, the Tax Court ruled that a mortgage loan officer with Liberty Mortgage, who was also president of the company with a 33.3% ownership interest, should have been classified as an independent contractor, rather than as an employee.

The taxpayer, Dean Cibotti, did not perform any services as an officer of Liberty Mortgage, but was named president because he had the largest individual ownership share of the business.

The Tax Court based its decision on the fact that:

(a) Liberty Mortgage did not have control over or dictate Cibotti’s hours of business, total hours, route, office location, or methods of obtaining clients;

(b) Cibotti maintained a home office (he didn’t have an office at Liberty Mortgage);

(c) Cibotti was paid a percentage of the proceeds from the mortgage loans he closed (he was not guaranteed any compensation);

(d) Cibotti was not provided any employee benefits, such as health insurance, life insurance, and retirement plans.

I do realize that tax status and Workers Compensation status are different in most states. However, I think these are good examples of what a court would examine when looking at the differences between an employee and an independent contractor.

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James J Moore - Workers Comp Expert

Raleigh, NC, United States

About The Author...

James founded a Workers’ Compensation consulting firm, J&L Risk Management Consultants, Inc. in 1996. J&L’s mission is to reduce our clients’ Workers Compensation premiums by using time-tested techniques. J&L’s claims, premium, reserve and Experience Mod reviews have saved employers over $9.8 million in earned premiums over the last three years. J&L has saved numerous companies from bankruptcy proceedings as a result of insurance overpayments.

James has over 27 years of experience in insurance claims, audit, and underwriting, specializing in Workers’ Compensation. He has supervised, and managed the administration of Workers’ Compensation claims, and underwriting in over 45 states. His professional experience includes being the Director of Risk Management for the North Carolina School Boards Association. He created a very successful Workers’ Compensation Injury Rehabilitation Unit for school personnel.

James’s educational background, which centered on computer technology, culminated in earning a Masters of Business Administration (MBA); an Associate in Claims designation (AIC); and an Associate in Risk Management designation (ARM). He is a Chartered Financial Consultant (ChFC) and a licensed financial advisor. The NC Department of Insurance has certified him as an insurance instructor. He also possesses a Bachelors’ Degree in Actuarial Science.

LexisNexis has twice recognized his blog as one of the Top 25 Blogs on Workers’ Compensation. J&L has been listed in AM Best’s Preferred Providers Directory for Insurance Experts – Workers Compensation for over eight years. He recently won the prestigious Baucom Shine Lifetime Achievement Award for his volunteer contributions to the area of risk management and safety. James was recently named as an instructor for the prestigious Insurance Academy.

James is on the Board of Directors and Treasurer of the North Carolina Mid-State Safety Council. He has published two manuals on Workers’ Compensation and three different claims processing manuals. He has also written and has been quoted in numerous articles on reducing Workers’ Compensation costs for public and private employers. James publishes a weekly newsletter with 7,000 readers.

He currently possess press credentials and am invited to various national Workers Compensation conferences as a reporter.

James’s articles or interviews on Workers’ Compensation have appeared in the following publications or websites:

  • Risk and Insurance Management Society (RIMS)
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  • Bloomberg Business News
  • WorkCompCentral.com
  • Claims Magazine
  • Risk & Insurance Magazine
  • Insurance Journal
  • Workers Compensation.com
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