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Tuesday, June 7, 2016

Worker classification questions

Worker classification - whether a worker is an employee or an independent contractor, is a longstanding and sometimes difficult issue. There are a few different classification schemes applicable to different types of laws (labor, tax, others). Employers tend to favor contractor status when possible to avoid payroll taxes, application of most labor laws (such as overtime), and many state laws governing how someone is paid, sick pay, reporting, and more.

Congress has punted on the issue since at least 1978 when it enacted a temporary provision ("Section 530") which was then made permanent a few years later. I thought the Affordable Care Act and its employer mandate would necessitate providing more clear classification guidance, but that did not happen. The Section 530 rule also prevents the IRS from issuing guidance on worker classification, further complicating matters for all parties.

Well, here are two recent developments highlighting the classification issue from tax perspectives.

First, a Tax Court decision from April 2016, BG Painting, Inc., TC Memo 2016-62. This painting company treated its workers as contractors. One of them filed Form SS-8 with the IRS asking the IRS to review how his employer classified him. When this happens, the IRS will also seek information from the employer. Here, the employer provided it and noted that the worker was the father of BG Painting's officer (!). The IRS determined that the worker was an employee. It sent a letter to BG telling them they should amend or file employment tax returns. BG tried to challenge that result in Tax Court but was denied due to a rule (IRC Section 7436) that prevents the court from ruling on en employment tax matter unless the IRS has made a tax determination. Since the IRS had not assessed any taxes on BG, there was no determination and thus no ability for the Tax Court to rule.

Second, is the labor law dispute involving some drivers from Uber and Lyft. This is a labor law matter, not a tax law matter. I have seen and heard talk that the settlement reached means that the drivers are contractors. The matter is not yet fully settled.  But, this is a labor law matter, not a tax law one. A settlement will not make the drivers contractors for tax purposes. That is a separate matter for the IRS to address.  That will be a private matter (unless one of the employers discloses it).

Many of today's freelancers look like employees in some ways (they don't all set the prices they charge and some can be fired) and contractors in some ways (set hours and many elements of how they work, no restriction on other work they do).  Perhaps a third category is needed.

What do you think?

For more info on worker classification for tax purposes - click here.

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