Tax Court Says Cleaning Service Workers are Independent Contractors

The IRS and employers often disagree over the classification of workers as employees or independent contractors. Expect these disputes to increase due to modified working conditions relating to the COVID-19 pandemic.

Jul 22nd 2020
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If a worker is classified as an employee, the employer must pay its share of payroll taxes, withhold the employee’s share of payroll taxes and required income taxes and report those amounts to the IRS. In contrast, if a worker qualifies as an independent contractor, the employer is relieved of those responsibilities.

Furthermore, the employer doesn’t have to provide fringe benefits— like health insurance and retirement plan benefits— that are being offered to other employees. However, if an employer improperly classifies an employee as an independent contractor, it could be assessed a significant tax bill for unpaid payroll taxes, plus interest and penalties.

The Tax Court follows certain guidelines for making a determination of the status of workers, but each case is decided on its own merits. Frequently, it boils down to the degree of control the employer has over the workers. If the employer exerts little or no control, the workers are likely to be treated as independent contractors.

In a new case, Santos, TC Memo 2028-88, 6/17/20, the taxpayer, who resided in Massachusetts, operated a cleaning services company that contracted with a residential apartment complex. The taxpayer didn’t have any written employment contracts with the workers. She did not guarantee them a minimum amount or frequency of work and they could decline to do a cleaning job for any reason. In fact, many workers cleaned for other individuals or businesses.

Upon arriving, the worker would be given a key to the apartment that needed to be cleaned and directed to that apartment by the property manager. The taxpayer would rarely go to apartments and supervise the cleaning or inspect the work.

If the cleaning was deficient in some respect and the worker had already left the property, the property manager would contact the taxpayer, who would then direct the worker to return to remedy the problems. At no point did the taxpayer formally discharge or terminate any of her workers.

Finally, the taxpayer never trained any of the workers. They could hire assistants, work when they wanted to and they bought their own supplies.

Based on these facts, the Tax Court concluded that the taxpayer had very little control over the workers. Accordingly, they should be treated as independent contractors, rather than employees.

Despite this favorable tax outcome, don’t assume that your clients are in the clear under similar circumstances. Document the actions, or lack thereof, that bolster the position that workers should be treated as independent contactors. Typically, employers may be granting more flexibility to workers in remote locations than they did before the pandemic, so have this reflected in the records. 

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