The Tax Court in Brief: Independent Contractor Case

Delgado v. Commissioner, T.C. Memo. 2021-84 | July 7, 2021 | Greaves, J. | Dkt. No. 191-20

Short Summary

Two companies paid the Petitioner for services performed as an independent contractor.  The companies submitted Forms 1099-MISC, Miscellaneous Income, to the IRS reporting the payments.  For the tax period, the Petitioner timely filed two Forms 1040EZ, Income Return, reporting zero income.  Based on the two Forms 1099-MISC it received, the IRS issued a Notice of Deficiency, which provided an increase in tax liability as well as a section 6662(a) penalty.  Petitioner timely petitioned the court for redetermination based on the Petitioner’s interpretation of section 7701(a)(26).

Key Issues:

  • Whether the IRS’s determination of the Petitioner’s tax liability and accuracy-related penalties is correct?
  • Whether the Petitioner engaged in a trade or business as defined by section 7701(a)(26)?

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Clifford Benjamin- Contractor Or Employee

If you hire someone for a long-term, full-time project or a series of projects that are likely to last for an extended period, you must pay special attention to the difference between independent contractors and employees.

Why It Matters

The Internal Revenue Service and state regulators scrutinize the distinction between employees and independent contractors because many business owners try to categorize as many of their workers as possible as independent contractors rather than as employees. They do this because independent contractors are not covered by unemployment and workers’ compensation, or by federal and state wage, hour, anti-discrimination, and labor laws. In addition, businesses do not have to pay federal payroll taxes on amounts paid to independent contractors.

If you incorrectly classify an employee as an independent contractor, you can be held liable for employment taxes for that worker, plus a penalty.

The Difference Between Employees and Independent Contractors

Independent Contractors are individuals who contract with a business to perform a specific project or set of projects. You, the payer, have the right to control or direct only the result of the work done by an independent contractor, and not the means and methods of accomplishing the result.
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If you’re a 1099 worker, your tax life is very different than that of employees. It’s vitally important to understand how to file your taxes when you’re a 1099 worker, or you can end up in big trouble with the IRS.

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If you know Jeeves, he is the fictional character in the series of humorous (read rib-tickling funny) short stories by P.G. Wodehouse. Jeeves is a very, very capable valet who gets his employer, Wooster out of many a sticky situation.

My father introduced me to P.G.Wodehouse’s books and there was no turning me back after that. The brilliant comic genius’ writing has kept me enthralled through long train rides, boring summer afternoons, quick breaks in the midst of grueling exams, you get the drift!

Now we may not all be able to afford a Jeeves in our lives, but a very common trend these days is to hire a nanny or an “au pair” if one has small gifts. Considering the sky-rocketing Read More


If you own or manage a business that uses independent contractors, you need to know when you can or cannot treat a worker as an independent contractor. This article answers some of the common questions about worker classification.


Misclassification of employees as independent contractors is now a common phrase uttered by state and federal legislators and regulators. State task forces have been formed to crack down on businesses that do not pay unemployment insurance and workers’ compensation premiums or withhold taxes for workers whom the state believes are employees and not Read More

contvsemp2Is it better to be an independent contractor or an employee? For a small business owner (SBO), the question mostly is, how to determine what business relationship exists between the person providing the services & the SBO; and if that relationship is that of an independent contractor or an employee.

So how is that determination made?

Common Law Rules fall into 3 categories. Behavioral: Does the company have the right to control what the worker does & how he does it?; Financial: Are the business aspects of the worker’s job controlled by the payer?; And the Type of Relationship: Are there written contracts or employee type benefits?

•The general rule of thumb is that one is an independent contractor if the payer (of the fees) has the right to control or direct only the result of the work and not what will be done and how it will be done.

•Hence you are not an independent contractor if you perform services that can be controlled by an employer (what will be done & how it will be done). You may have freedom of action but the employer has the legal right to the details of how the services will be performed.

An independent contractor is considered self-employed and employee is not. Read More

Ah, so we meet again, my tax-paying co-conspirators! Penny Taxwise back atcha, and this week, I’m continuing the trend started by last week’s post. The topic du jour? Why, taxes for the self-employed, of course! This time, I want to focus on a question asked by a fellow self-employed Tax Connections member. The member writes:

Do I need a Federal Employer Tax ID Number (FEIN) for my home business?

Great question. Let me tell you a little story that I probably shouldn’t. Long before I became a freelance writer (think college years), I tried my hand at a range of other online ventures. The biggest of which was a stint selling clearance items on eBay. Hey, I’m not too proud to own up to my past!

Anyway, I digress. When I was in the thick of my eBay adventure, I spontaneously got the wild idea that I needed a business license and a FEIN. I applied for and received both, though I don’t know why I did. I was losing more money than I was making, and the entire online escapade only lasted for a few short months. I let the business license expire and walked away from my failed attempt as a (faux) business owner. Even though I had a FEIN, I failed to realize what it actually was. Chalk it up to the sophomoric over-eagerness of my early twenties.

Flash forward to thirty-year-old me, and you’ll see a completely new girl. I’m the proud owner of a one-women biz… and it’s thriving. I find myself revisiting the question of whether to obtain my FEIN – only this time, I plan to do a little homework before I apply.

FEIN – Do You Really Need One?

Another Tax Pro to the rescue. This time, Conrado Mangapit rushed to our aid. He’s a tax consultant and instructor with the Chesapeake Bay Development Group in Maryland. He had this to say about obtaining a FEIN:

If you are a sole proprietor filing a Schedule C and have NO employees subject to federal/state income tax withholding, Social Security and Medicare withholding you will not require a federal employer tax identification number.

Hmm… so it looks as if home-based business owners like myself are in the clear. We’re not compelled to seek a FEIN if we’re working alone. Your business tax forms will require nothing more than your social security number if you’re the only one in your biz and you’re blessedly unincorporated. No muss, no fuss. I can dig it, can you?

When a FEIN Becomes Important

Now it’s time to navigate some issues that are a bit tougher to unravel. Namely: what to do when it’s time to expand. One fundamental truth about business is that, eventually, everyone will come to the same major crossroads. Expand, or resign yourself to the maximum amount of earnings you can generate on your own.

I’ve found myself in this exact place recently. I’ve know that no matter how well I think I can write, I’ll eventually reach a point where I can no longer raise my rates for new clients. That’s when my earnings will cap, and I will no longer be able to increase my annual income. Hence, the crossroads. I could accept my fate and toil away at that amount forever… or I could choose to expand my biz.

I can’t imagine that anyone ambitious enough to work at home would choose to paint themselves into a corner by refusing to branch out. I know I certainly wouldn’t. Which brings us back to the question of the day – once you begin taking on outside help, is it time to finally obtain that FEIN?

Answer: it depends. If you’re hiring independent contractors, then you may not need one. If you’re hiring full-fledged employees, however, you will need one for certain. The SBA has a great analysis of the difference between independent contractors and employees, so check it out when you have the time. After I gave it a read, I learned that in my particular situation, I would do best to hire other independent contractors to work with me at arm’s length until I grow into a biz that can actually sustain employees.

Check out this page on the official IRS website and take the interactive quiz. It will ask you questions about your business situation and advise whether you should obtain your FEIN.

Even if you take the quiz and discover you don’t have to secure a FEIN, in some cases, in may still be a good idea to snag one anyway. Sole proprietors are beginning to elect to use a FEIN in much greater numbers – even when they don’t need it – simply because having one dramatically reduces the chances of identity theft. Plus, many banks now require a FEIN to open your business account, so it’s worth looking into.

If you decide to go for it, you’ll need to complete the Form SS-4 to get your new FEIN. Make sure you do it directly through and steer clear of any websites that ask you for payment in order to obtain one for you. It’s a common scam. Moreover, filling out and filing the form is as straightforward as it gets. Easy-peasy. Just go to the source and take care of it on your own.

If you’re still unsure about how to proceed after reading all this, then just take the plunge and get one already! Can’t hurt, and if you do decide to expand in the future, you’ll already have that task checked off your “to-do” list.

Until next time, my tax-talking tulips!

Making Cents Count,