Employee or Independent Contractor? What Did the Tax Court Decide?
The question of "Employee vs. Independent Contractor" is one of the most difficult in employment law, because there are many variables to consider and each case is different. Here is a case that came before the Tax Court in 2008 - I'll give you the particulars. You tell me what you think the Tax Court decision was, on the Forum. I will give you their decision in a few days*.
The Details of the Case
These details are taken directly from the Tax Court Case Memo:
- "Jim" was hired by an industrial company ("THC") as a project engineer, because of his specialized knowledge, and he was expected to perform a specific task. He worked for the company on a project-by-project basis, over 4 years.
- Jim received no training for his work, beyond some minimal instruction in the specific details of the equipment he was working on.
- He had no hiring or firing authority over company employees.
- He was given a THC credit card with the company logo on it.
- He invoiced the company for projects and was paid a daily rate. He did not keep time sheets.
- THC gave Jim a 1099-MISC each year for 4 years; he never received a W-2 and Jim paid no withholding or self-employment taxes.
The IRS said he was liable for self-employment tax, since he was an independent contractor. The case went to Tax Court. What did the Tax Court rule on Jim's status?
I have put a thread on the Forum for you to use in commenting. You can see it on the "Community Forum" link on the right. You will need to Register to use the forum; it will only take a few minutes. Over the next few months, you can use the Forum for information on tax filings during tax season.
For More Information
Here are some of my articles on this subject to help you decide:
Employee vs. Independent Contractor
Applying for Determination on Independent Contractor/Employee Status
The "Independent Contractor" Trap
Comments
Jean,
I actually know the Tax Court case you are referring to (don’t worry I won’t reference it). “Jim” did not file tax returns 2002-2006. It’s not suprising the IRS used the 1099s filed by the “employer” to prepare substitute for returns (SFR) for those years. It’s also not surprising the IRS assessed income and self-employment tax based on those 1099s.
The IRS has a long history of attacking employers for misclassifying workers, so it was suprising the IRS took the position that “Jim” was an independent contractor. While the Tax Court essentially agreed with “Jim”, it actually bolstered the IRS pursuit of employers who misclassify their workers.
A very simplistic test…If you have to ask the question (employee versus independent contractor), the worker is an employee.
Clearly, “Jim” could have handled this situation better by filing tax returns for the years in question. He could have used From 4137 (Form 8919 was not available prior to 2007) to calculate his share of Social Security tax in lieu of computing self-employment tax on Schedule SE.
To be perfectly honest, I’m not sure why this even esculated to Tax Court. If “Jim” had better IRS representation, this matter should have been easily resolved long before it got that far.
Neil Johnson
The Tax DudeŽ
www.thetaxdude.com
taxdude@covad.net
Can you please give the answer? I would like the name of the case please - thanks.