When there is established precedent, can a taxpayer reach a different result? On February 18, 2020 the Tax Court held that Eileen Dunlap, an ex-national sales director of Mary Kay Cosmetics, Inc., was subject to self-employment (SE) tax on her post-retirement payments from Mary Kay.1

Background

Mary Kay Cosmetics, Inc. is a manufacturer and seller of cosmetics and related products. Ms. Eileen Dunlap was a Mary Kay beauty consultant and worked as a salesperson independent contractor. She purchased products at wholesale prices from Mary Kay and resold them at retail prices. She received commissions and bonuses from Mary Kay for the products she sold. With excellent sales skills, she became a sales director in 1981. As a sales director, she recruited and trained beauty consultants to sell Mary Kay products. She received commissions and bonuses based on the sales of the consultants in her tier. Mary Kay made monthly payments to its independent contractors, like Dunlap, and no taxes were withheld from the payments. If one of her consultants stop working for Mary Kay, Dunlap’s monthly payment was reduced. Dunlap and the consultants she recruited had agreements with Mary Kay that set forth their duties, rights, and commission structure.
Once Dunlap recruited a certain number of sales directors, she was promoted to national sales director in 1988. She had sales directors and consultants in her tier but had no direct authority over them. Mary Kay did not have an employer-employee relationship with their national sales directors, sales directors, and consultants. The flowchart below is Mary Kay’s operational structure.
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