Tax Court Case Highlights Factors for Establishing Employment Tax Relationship
April 24, 2014
A recent Tax Court summary opinion highlights the factors that businesses need to consider when determining if a service provider is an employee or an independent contractor. In Atig Rahman v. Commissioner of Internal Revenue, the taxpayer worked as a group home manager for a business that provided home and other care services to adults with disabilities. The taxpayer’s employer claimed he was hired as an independent contractor, not an employee.
The court pointed to seven factors established in IRS regulations and case law to determine the taxpayer’s status:
- The degree of control exercised by the principal (business owner) over the details of the work
- The taxpayer’s investment in the facilities and equipment used in his work
- The taxpayer’s opportunity for profit or loss
- The permanency of the relationship between the parties
- The principal’s right of discharge
- Whether the work performed was an integral part of the principal’s regular business
- The relationship the parties think they are creating
The court focused on the application of the first factor which, according to the court, is “the most important consideration in determining the nature of a working relationship.” The court held that the principal demonstrated a level of supervision equal to that of an employer because it required the individual to complete tasks following a posted listing of duties and responsibilities and required the individual to give daily updates to the principal.
The court’s opinion also noted that the individual did not pay for any tools or supplies out of pocket, was paid an hourly wage, and generally worked a 40-hour week.
Although a Tax Court summary opinion cannot be cited as legal precedent, the factors used to establish an employment agreement often are applied by the IRS in employment tax examinations. Businesses that are concerned that they might have independent contractor arrangements that could be classified as employment tax agreements might want to consider participation in the IRS Voluntary Classification Settlement Program outlined in Announcement 2012-45.
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