Partnership Misclassified Staff as Contractors, Owes Taxes

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A Texas limited partnership that classified workers in an apartment complex as independent contractors instead of employees owes employment taxes for the building staff, as well as tax additions and penalties for not depositing the disputed employment taxes.

TFT Galveston Portfolio Ltd. owed unreported employment taxes for the fourth quarter of tax year 2004, the U.S. Tax Court said. The company was deemed not responsible for several other years of unpaid federal employment taxes and penalties as a successor in interest to six other limited partnerships involved in the apartment complex business.

The workers were not required to complete applications before securing their positions and did not sign written agreements for the work they performed. The partnerships did not deposit employment taxes for tax years 2000 to 2004.

The workers were being treated as independent contractors for filings of Forms 1065, U.S. Return of Partnership Income, for the partnerships for which TFT Gavelston was a successor in interest.

Regarding the 2004 fourth-quarter employment taxes owed, TFT Galveston argued that the workers were independent contractors, and that it was not responsible for withholding employment taxes.

However, the U.S. Tax Court viewed the workers as employees because it considered nearly every aspect of the work performed by the apartment workers to have been controlled by an employer.

The workers had little financial investment in TFT Galveston's business, were never at risk of suffering a personal financial loss and never had an opportunity for financial profit other that their salaries, the court said, ruling that the workers were to be classified as employees for tax purposes.

TFT Galveston also had not established reasonable cause for not filing the employment taxes and owed tax code Section 6651(a)(1) additions to tax, as well as Section 6656 penalties, the court said.

For more information, see Compensation and Benefits Library's “Employer's Guide to Federal Employment Taxes” chapter.

To contact the editor on this story: Michael Trimarchi in Washington at mtrimarchi@bna.com.