Employee or Independent Contractor? The Tax Court Decision

The Tax Court decision in this case (which I described last week) was handed down in November 2008. The McWhorter Case (T.C. Memo. 2008-263) was interesting; I was a little surprised at the decision.

The Decision, and Some Points Worth Noting

• Burden of Proof
  The burden of proof is usually on the taxpayer, but the Court noted that if
  

  a taxpayer introduces credible evidence with respect to any factual issue relevant to ascertaining the liability of the taxpayer for any tax imposed by subtitle A or B, the Secretary [of the Treasury; that is, the IRS] shall have the burden of proof with respect to such issue.

• Worker Not an Independent Contractor
  The Court said it was not persuaded that the IRS had proved that "Jim" was an independent contractor. It noted that, "[N]either the degree of control exercised by Boyle Energy nor the amount of skill possessed by petitioner distinguishes his situation from that of a supervisory employee. "
  
  
• Work Not Impermanent
  The Court also felt that the job was not "impermanent," as the IRS had contended.
  
  
• Worker Not Responsible for Self-employment Taxes
  The Court concluded that "Jim" was not responsible for self-employment taxes for 2001 (the first year he worked for Boyle Energy.)
  
  
• But, Taxes Must Be Paid
  In what sounds like a "Good news: Bad news" joke, he Court also noted that " The failure of Boyle Energy to withhold taxes that should have been withheld neither excuses petitioner’s failure to file the return and pay the taxes nor relieves him of the additions to tax under section 6651(a)." This part of the decision is complicated, because although the worker was not necessarily responsible for 2001 self-employment tax, yet the failure to pay these taxes requires him to pay fines and penalties. The Tax Court noted that the payment of taxes, fines, and penalties was out of their jurisdiction.

  IRS Determination Request Available
  I confess I was surprised at the court's decision with regard to their consideration of "Jim" as an employee. But this just points out the difficulty of guessing what the IRS and the Tax Court will decide. If you are considering hiring someone and you're not sure whether the person should be an independent contractor or an employee, you can get a determination from the IRS, by filing a Form SS-8. Better to find out now rather than have to go to Tax Court.

  Thanks to those of you who participated in the discussion.