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The Latest Tax Court Pronouncement on Employee vs. Independent Contractor

In Donald T. Robinson (TC Memo 2011-99), the Tax Court ruled that a full-time college professor at University A, who also taught classes and prepared curricula for University B, should have been classified by University B as an independent contractor, and not an employee.
IRC Section 3121(d)(2) defines “employee”, for employment tax purposes, as “any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee.” But what does that mean? Factors considered by courts in determining whether an individual is an employee or independent contractor include:
(1) the degree of control exercised by the principal;
(2) which party invests in the work facilities used by the worker;
(3) the opportunity of the individual for profit or loss;
(4) whether the principal can discharge the individual;
(5) whether the work is part of the principal’s regular business;
(6) the permanency of the relationship;
(7) whether the worker is paid by the job or by the time;
(8) the relationship the parties believed they were creating; and
(9) the provision of employee benefits.
The Tax Court concluded that the professor was an independent contractor. Why? Because University B exercised little control over the professor’s work. Also, the professor did not have an office at University B; the professor was free to market his services to other businesses; and University B did not provide the professor any employee benefits.
This is a good opportunity to remind ourselves of the relevance of the employee versus independent contractor distinction in the employment tax setting. Subject to a base limit, the compensation of every employee is subject to FICA taxes (commonly called social security taxes). Further, IRC Section 3102(a) requires employers to withhold FICA taxes from an employee’s pay. If the employer fails to withhold the tax, it is still liable for payment of the tax. In addition, the employer must also pay a matching FICA tax equal to the employee portion of the tax. Lastly, a federal unemployment tax (FUTA ) is assessed on employers on all “wages” paid in a calendar quarter, although frequently employers never actually pay federal unemployment taxes due to credits they receive for payment of state unemployment taxes. An independent contractor (or self-employed person), on the other hand, pays for his or her own social security in the form of self-employment taxes (SECA). A self-employed person pays an amount equal to the employee portion plus the employer portion of employment taxes.
The IRS frequently targets employers for the FICA taxes of workers the employer classifies as independent contractors but the IRS believes are truly employees. The lesson for employers seeking to avoid this problem: review the factors listed above, treat your workers in the most independent contractor-like fashion possible, and always consult your attorney!

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