Employment Status — Employee v. Independent Contractor (Portfolio 391)

Tax Management Portfolio, Employment Status — Employee v. Independent Contractor, No. 391-4th, describes in detail who is an “employee” for federal employment tax purposes and emphasizes the controversial difference between “employee” and independent contractor. Defining the “employee” requires an examination of both the applicable common law factors and any special statutory provisions in the area.

To view this Portfolio, take a free trial to Bloomberg Tax

Bloomberg Tax

This Portfolio is available with a subscription to Bloomberg Tax, a comprehensive research solution including over 500 Tax Management Portfolios, practice tools, primary sources and timely news.

Description

Tax Management Portfolio, Employment Status — Employee v. Independent Contractor, No. 391-4th, describes in detail who is an “employee” for federal employment tax purposes and emphasizes the controversial difference between “employee” and independent contractor. Defining the “employee” requires an examination of both the applicable common law factors and any special statutory provisions in the area.

This Portfolio examines the definition of employee, as well as the definition of wages and of employer for federal employment tax purposes. Since the authorities do not form a cohesive whole, each occupation is also examined separately under the common law rules and — when applicable — under the special statutory rules. Attempted statutory solutions to this controversial area have been examined in particular detail, both as to their applicability as well as their effectiveness.

Authors

Helen E. Marmoll

Helen E. Marmoll, A.B., Marquette University; J.D., Washington College of Law of American University; formerly a Tax Division trial attorney with Department of Justice; member, American Law Institute; member, Virginia Bar, the District of Columbia Bar and the Maryland Bar; member, American Judicature Society, Chairperson, Prince William Bar Association Library Committee; member, Virginia Women Attorneys Association.

Table of Contents

Detailed Analysis
I. Statutory Provisions Involved
Introductory Material
A. The Section 530 Safe Harbor Statute
1. Reasonable Basis Test
a. Decision:
b. Past Audit:
c. Industry Custom:
d. Other Reasonable Manner:
2. Tax Return Test
3. Position Test
4. Exception to Section 530
B. Classification Settlement Programs and Early Referrals
1. Classification Settlement Program
2. Early Referral Program
3. Voluntary Classification Settlement Program
C. Income Tax Provisions
1. Section 61
2. Section 162
3. Benefit Plans
D. Employment Tax Provisions
1. Federal Insurance Contributions Act
2. Federal Unemployment Tax Act
3. Income Tax Withholding
4. Self-Employment Contributions Act (SECA)
5. Section 3505
6. Section 3509
II. Pertinent Indicators
A. General Tests
B. Indicator Zones and Their Specific Factors
1. Details of Work Performance
a. Instructions
b. Training
c. Set Hours of Work
d. Full Time Required
e. Order or Sequence Set
f. Oral or Written Reports
g. Skill
h. Labels
2. Expenses of Work Performance
a. Payment of Business and/or Traveling Expenses
b. Furnishing of Tools and Material Names
c. Significant Investment
d. Licenses and Taxes
3. Compensation for Work Performance
a. Payment by Hour, Week, Month
b. Realization of Profit or Loss
c. Insurance
d. Benefits
4. Duration of Work Position
a. Right of Discharge
b. Right to Terminate
c. Continuing Relationship
5. Structure of Work Position
a. Integration
b. Services Rendered Personally
c. Hiring, Supervising, and Paying Assistants
d. Working for More Than One Firm at a Time
e. Making Service Available to General Public
f. Principal in Business
g. Intent
h. Governmental or Regulatory Rules
i. Industry Custom
j. State Law Characterization
k. Incorporation
6. Location of Work Performance
III. Identifying Wages
A. Definition of Wages
1. Meals and Lodging
2. Statutory Fringe Benefits
B. Exceptions to Definition of Wages
C. Nonresident Aliens
D. Foreign Source Income
E. Benefit Plans
F. Unemployment Compensation
G. Special Situations
H. FICA and FUTA Liability Limits
IV. Identifying Employment
A. Employer Defined
B, Certified Professional Employer Organizations (CPEOs)
C. Application
V. Analysis of Authorities by Occupation
A. Applying the Law to Specific Facts
B. Alphabetical Treatment
1. Accountants
2. Actors
3. Actresses
4. Advertising Sales Agents
5. Anesthetists
6. Apartment Managers
7. Appliance Sales Agents
8. Applicators
9. Appraisers
10. Arbitrators
11. Architects
12. Artisans
13. Artists
14. Associate Physicians
15. Athletes
16. Athletic Officials
17. Attorneys
18. Auctioneers
19. Auditors
20. Automobile Mechanics
21. Automobile Repairers
22. B-Girls
23. Babysitters
24. Bail Agents
25. Bakery Dealers
26. Bakery Distributors
27. Bakery Products Sales Agents
28. Band Leaders
29. Band Members
30. Bar Pilots
31. Barbers
32. Bean Station Operators
33. Beauticians
34. Beef Boners
35. Bellboys
36. Belly Dancers
37. Big Boys
38. Bill Collectors
39. Biologists
40. Blind Persons
41. Board Members
42. Boat Engineers
43. Bonding Agents
44. Bondsmen
45. Bookkeepers
46. Brokers
47. Bulk Oil Distributors
48. Burial Lot Sales Agents
49. Bus Drivers
50. Business and Legal Service Providers
51. Butlers
52. Cable TV Subscription Sales Agents
53. Car Drivers
54. Car Inventory Services
55. Car Shuttlers
56. Caretakers
57. Carpenters
58. Carpet Sales Agents
59. Case Workers
60. Catalog Sales Merchants
61. Caterers
62. Catering Workers
63. Cattle Buyers
64. Cattle Dealers
65. Central Telephone Services
66. Chauffeurs
67. Chefs
68. Chick Raisers
69. Chick Sexers
70. Child Care Personnel
71. Child Study Research Coordinators
72. Christmas Wreath Makers
73. Circus Performers
74. Clothing Sales Agents
75. Club Membership Sales Agents
76. Coal Hustlers
77. Coal Unloaders
78. Collectors
79. Commodity Buyers
80. Companions
81. Concessionaires, Carnivals
82. Consignees
83. Construction Workers
84. Consultants
85. Corporate Officers
86. Contest Managers
87. Contract Furniture Sales Agents
88. Contractors
89. Cooks
90. Correspondents
91. Cotton Buyers
92. Counsels
93. Country Correspondents
94. Court Reporters
95. CPAs
96. Credit Union Supervisors
97. Custodians
98. Dairy Supervisors
99. Dairy Testers
100. Deboners
101. Deliverymen
102. Demonstrators
103. Dental Hygienists
104. Design Engineers
105. Directors
106. Directory Services
107. Disc Jockeys
108. District Sales Managers
109. Doctors
110. Domestics
111. Door Sales Agents
112. Drainage Construction Workers
113. Drainage Ditch Repairers
114. Dress Contractors
115. Drivers
116. Dry Cleaners’ Managers
117. Editors
118. Electrical Appliance Sales Agents
119. Embalmers
120. Embroiderers
121. Engineering Consultants
122. Entertainers
123. Envelope Addressers
124. Escorters
125. Executive Committees
126. Executors
127. Exercise Boys
128. Exercise Riders
129. Factory Outlet Managers
130. Farm Managers
131. Farm Operators
132. Farmers
133. Fashion Designers
134. Fiduciaries
135. Fishermen
136. Fishing Boat Captains
137. Fishing Boat Crews
138. Floor Layers
139. Flour Sales Agents
140. Food Service Equipment Sales Agents
141. Foreign Entertainers
142. Free-Lance Jockeys
143. Free-Lancer Jockeys
144. Fruit Packers/Pickers
145. Fur Trappers
146. Furniture Sales Agents
147. Furniture Unloaders
148. Gardeners
149. Gas Station Operators
150. Geologists
151. Go-Go Dancers
152. Golf Pros
153. Governesses
154. Government Contracts
155. Gravediggers
156. Grooms
157. Guardians
158. Gypsy-chasers
159. Hair Dressers
160. Hair Stylists
161. Handicap Secretaries
162. Handicappers
163. Handwork Workers
164. Hatcheries
165. Hearing Officers
166. Hog Buyers
167. Hog Dealers
168. Home Demonstration Agents
169. Home Improvement Sales Agents
170. Home Improvement Workers
171. Home Study School Sales Agents
172. Homemakers
173. Home Workers
174. Hostesses
175. Hotel Managers/Operators
176. Hotwalkers
177. House Builders
178. House-to-House Canvassers
179. House-to-House Sales Agents
180. Household Furniture Sales Agents
181. Housemen
182. Humpers
183. Income Tax Examiners
184. Inspectors
185. Installers
186. Instructors
187. Insurance Adjusters
188. Insurance Agents
189. Insurance Company Branch Managers
190. Interpreters
191. Interviewers
192. Inventory Services
193. Janitors
194. Jockeys
195. Land Clearers
196. Landmen
197. Lawyers
198. Lecturers
199. License Plate Distributors
200. Linesmen
201. Livestock Dealers
202. Loan Solicitors
203. Loggers
204. Lumberjacks
205. Machine Tool Accessory Sales Agents
206. Magazine Sales Agents
207. Magazine Solicitors
208. Mailmen
209. Managers
210. Manicurists
211. Manufacturer's Representatives
212. Manufacturer's Representatives’ Sub-agents
213. Market Surveyors
214. Masons
215. Meat Slaughterers
216. Mechanics, Home Improvements
217. Mediators
218. Merchandise Sales Agents
219. Merchants Police
220. Metal Storm Sash Sales Agents
221. Milk Distributors
222. Milk Haulers
223. Milk Sales Agents
224. Miners
225. Ministers
226. Models
227. Motel Operators/Managers
228. Musicians
229. Narrators
230. Needlework Workers
231. Negotiators
232. Newspaper Boys
233. Newspaper Carriers
234. Newspaper Dealers
235. Newspaper Delivery Personnel
236. Newspaper Plant Operators
237. Newspaper Reporters
238. Newspaper Route District Men
239. Night Watchmen
240. Nurses
241. Oil Distributors
242. Oil Products Distributors
243. Oil Well Pumpers
244. Orchestra Leaders
245. Orchestra Members
246. Organ Tuners
247. Organizers
248. Outside Readers
249. Outside Salesmen
250. Owners/Operators
251. Part-Time Teachers
252. Patented Products’ Sales Agents
253. Pathologists
254. Patrollers
255. Pattern Makers
256. Peace Officers
257. Periodical Sales Agents
258. Photographers
259. Physicians
260. Piano Tuners
261. Piecemakers
262. Pilots
263. Plant Operators
264. Police
265. Policing Agents
266. Porters
267. Postmasters
268. Poultry Slaughterers
269. Printers
270. Prisoners
271. Process Servers
272. Proctors
273. Professional Athletes
274. Professors
275. Protectors
276. Pursers
277. Quilters
278. Race Track Stewards
279. Radio Sales Agents
280. Radiologists
281. Real Estate Investment Trusts Managers
282. Real Estate Sales Agents
283. Realtors
284. Receivers
285. Redcaps
286. Referees
287. Repairers
288. Research Assistants
289. Research Associates
290. Research Coordinators
291. Researchers
292. Resident Doctors
293. Restaurant Operators
294. Retail Furniture Sales Agents
295. Roofers
296. Roofing Applicators
297. Roofing Sales Agents
298. Sales Agents
a. Ads
b. Burial Lots
c. Catalog Sales
d. Club Memberships
e. Commodities
f. Demonstrators
g. Household Items
h. Loans
i. Manufacturer's Representatives
j. Real Estate and Securities
k. Sales Clerks
l. Stationery
m. Subscriptions
n. Swimming Pools
o. Telephone Solicitations
p. Tires
q. Used Cars
r. Yachts/Ships
299. Sales Agents Helpers
300. Sales Clerks
301. Schochets
302. Seafood Processing Workers
303. Seafarers
304. Seamstresses
305. Securities Sales Agents
306. Security Personnel
307. Servants
308. Sewers
309. Sewing Machines Sales Agents
310. Sextons
311. Sharecroppers
312. Ship Sales Agents
313. Siding Applicators
314. Siding Sales Agents
315. Skidders
316. Slaughtering House Workers
317. Slaughtering Plant Workers
318. Speakers
319. Special Peace Officers
320. Stationery Sales Agents
321. Stenographers
322. Stone Applicators
323. Stonecutters
324. Store Managers
325 Student Researchers
326. Students
327. Subcontractors
328. Subscription Sales Agents
329. Substitute Teachers
330. Supervisors
331. Swampers
332. Swimming Pool Sales Agents
333. Tailors
334. Taxicab Drivers
335. Teachers
336. Teamsters
337. Telephone Directory Distributors
338. Telephone Operators
339. Telephone Solicitors
340. Temporary Sales Clerks
341. Tenant Farmers
342. Tennis Pros
343. Tire Sales Agents
344. Title Examiners
345. Tow Truck Operators
346. Trade Consultants
347. Traffic Controllers
348. Traffic Regulators
349. Trailer Park Managers
350. Trainers
351. Transcribers
352. Truck Drivers
353. Trust Property Managers
354. Trustees
355. Tutors
356. Typists
357. Umpires
358. Union Officials
359. Unloaders
360. Used Car Salesmen
361. Utility Bill Collectors
362. Vacuum Cleaner Sales Agents
363. Variety Entertainers
364. Vaudeville Acts
365. Waiters
366. Waitresses
367. Watch Repairers
368. Water Well Builders
369. Watermen
370. Weavers
371. Welcome Wagon Personnel
372. Welders
373. Well Grouters
374. Well Packers
375. Well Sealers
376. Wharf Builders
377. Window Trimmers
378. Window Washers
379. Wrestlers
380. Writers
381. Yacht Sales Agents
VI. Special Situations
A. Agricultural Labor
B. Aliens
C. Criminals
D. Domestics
E. Family Members
F. Foreign Governmental Employees
G. Governmental Employees
1. State Governments and Indian Tribes
2. Federal Instrumentalities
H. Partners
I. Religious/Charitable Employees
J. Students/Trainees
VII. Employment Tax Litigation Considerations
A. “Safe Haven” or “Safe Harbor”
B. Burden of Proof & Choice of Forum
C. Stare Decisis Argument
D. Impossibility Argument
E. Math/Credit Argument
F. Successor Liability

Working Papers

Table of Worksheets
Worksheet 1 Contract Establishing an Independent Contractor Relationship with a Typist While Avoiding the Homeworker Classification
Worksheet 2 Contract Establishing an Independent Contractor Relationship with a Personnel Placement Service Worker
Worksheet 3 Contract Establishing an Employee Relationship with a Temporary Consultant
Worksheet 4 Contract Establishing Independent Contractor Relationship with a Consultant when the Prime Contractor Has Obtained a Contract from the Government
Worksheet 5 Independent Contractor Agreement for Real Estate Agent
Worksheet 6 Independent Contractor Agreement for Direct Sellers
Worksheet 7 Sample Jury Instructions Regarding the Effect of Local Laws or Regulations
Worksheet 8 Sample Jury Instructions Regarding Shifting the Burden of Proof to the Government and the Nature of the Government's Burden
Worksheet 9 Sample Jury Instructions on the “Safe Haven” or “Safe Harbor” Provisions of Section 530 of the Revenue Act of 1978
Worksheet 10 Sample Jury Instructions on Certain Common Law Factors Used in Determining Employee vs. Independent Contractor Status
Worksheet 11 Section 530 of the Revenue Act of 1978, As Amended

Working Papers

Table of Worksheets

Worksheet 1 Contract Establishing an Independent Contractor Relationship With a Typist While Avoiding the Homeworker Classification

Worksheet 2 Contract Establishing an Independent Contractor Relationship With a Personnel Placement Service Worker

Worksheet 3 Contract Establishing an Employee Relationship With a Temporary Consultant

Worksheet 4 Contract Establishing Independent Contractor Relationship With a Consultant When the Prime Contractor Has Obtained a Contract From the Government

Worksheet 5 Independent Contractor Agreement for Real Estate Agent

Worksheet 6 Independent Contractor Agreement for Direct Sellers

Worksheet 7 Sample Jury Instructions Regarding the Effect of Local Laws or Regulations

Worksheet 8 Sample Jury Instructions Regarding Shifting the Burden of Proof to the Government and the Nature of the Government's Burden

Worksheet 9 Sample Jury Instructions on the "Safe Haven" or "Safe Harbor" Provisions of Section 530 of the Revenue Act of 1978

Worksheet 10 Sample Jury Instructions on Certain of the Common Law Factors Used in Determining Employee vs. Independent Contractor Status

Worksheet 11 Rev. Proc. 85-18, 1985-1 C.B. 518, Safe Haven Rules

Worksheet 12 Classification Settlement Program (CSP) - IRM 4.23.6

Worksheet 13 IRS Worker Classification Training Materials

Worksheet 14 CCA 200009043 (1/4/00) on When to Issue a Notice of Determination Under § 7436 with Respect to a Worker who is a Corporate Officer

Worksheet 15 CCA 200038045 (8/19/00), Follow-up to CCA 2000009043, on Several Areas Related to Corporate Officer Compensation and Classification

Worksheet 16 Worker Classification - Excerpt from IRM 4.25.5

Worksheet 17 Section 530 Relief - Excerpt from Internal Revenue Manual 4.23.5

Worksheet 18 Section 530 Flowchart - IRM Exhibit 4.23.5-5

Bibliography

OFFICIAL

Statutes:

Treasury Regulations:

Treasury Rulings:

Cases:

UNOFFICIAL

Periodicals:

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007