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Worker Classification Questions—Employee or Contractor?



Annette Nellen

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, etc.). Employers tend to favor contractor status when possible to avoid payroll taxes, application of most labor laws (such as overtime), and 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 the tax perspective.

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 an 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?

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Annette Nellen, CPA, Esq., is a professor in and director of San Jose State University’s graduate tax program (MST), teaching courses in tax research, accounting methods, property transactions, state taxation, employment tax, ethics, tax policy, tax reform, and high technology tax issues.

Annette is the immediate past chair of the AICPA Individual Taxation Technical Resource Panel and a current member of the Executive Committee of the Tax Section of the California Bar. Annette is a regular contributor to the AICPA Tax Insider and Corporate Taxation Insider e-newsletters. She is the author of BNA Portfolio #533, Amortization of Intangibles.

Annette has testified before the House Ways & Means Committee, Senate Finance Committee, California Assembly Revenue & Taxation Committee, and tax reform commissions and committees on various aspects of federal and state tax reform.

Prior to joining SJSU, Annette was with Ernst & Young and the IRS.

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