Tuesday, July 17, 2012

The 'An employee by any other name...' Case

The IRS correctly reclassified a farm owner's 'subcontractors' as employees. Worker misclassification is supposedly a new focus of both the IRS and many states but their strong words still ring as more of an idle threat due to seemingly little enforcement. Since more misclassification is expected with the onset of new health insurance mandates in 2013 for employers with 50+ full-time employees, perhaps there will be more follow through.

In this case the taxpayer was placed on the hook for the not only the employment taxes but also for failure to file penalties for not having filed employment tax related forms. This additional, significant level of penalties would not apply as long as a taxpayer had him/herself as an employee (in the case of a corp) or had at least one employee so that forms were filed.

The workers in question worked solely for the taxpayer, for a lengthy period of time, for a fixed rate of pay using tools/equipment that she provided. The work they did was integral to the taxpayer's daily business and there was nothing in place to impede her ability to either control their work or to discharge them.

Summarized below are some of the key factors which come to bear on these cases. The IRS/court considers all of the facts and circumstances of each case, and no single factor is determinative.

(1) the degree of control exercised by the principal; the degree of control necessary to find employment status varies with the nature of the services provided by the worker. the principal need not actually direct or control the manner in which the services are performed; it is sufficient if the principal has the right to do so;

(2) which party invests in the work facilities used by the worker;

(3) the opportunity of the individual for profit or loss; a salary-like nature of pay and lack of entrepreneurial risk or opportunity would indicate employment;

(4) whether the principal can discharge the individual; employers typically have the right to terminate employees at will; lack of evidence of any limitation on this right indicates employment;

(5) whether the work is part of the principal’s regular business;

(6) the permanency of the relationship; and

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

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