This is a follow-up to an article published in January regarding Uber and Lyft and whether they were misclassifying their workers. As research for that piece, I went undercover as an Uber and Lyft driver after a response came out to a Class Action Lawsuit that Uber drivers filed against Uber.
The lawsuit is still pending, and in my article I determined that, as an Uber and Lyft driver, I was never treated as an employee. Fast forward almost a year later, and the employee versus contractor debate is bigger than ever.
My best friend’s fiancée is a home healthcare nurse. She signed an agreement with two companies stating that she was a contractor and responsible for her own taxes.
The question is: Does signing these types of contracts mean anything?
The answer is no. An employee/employer relationship is determined when an employer exerts any control over their workers.
What does that mean? Quite simply it means this: I hire my son, who’s a freshman in college, as an intern. He is required to work 12-5 p.m. every day. I tell him what to do and how to do it. He has a desk and a computer that I provide. I pay him an hourly salary and commission for the work that he completes. He is my employee because I have control over him.
In the case of my friend’s fiancée, she is told where to perform her job. She is told where to work and at what time she is supposed to work. She is paid hourly. She does not hold herself out to be self-employed. When she shows up to her assignment, it is as a representative of the company that she works for. She is an employee.
What was hard to get through to her, as it is with most people in her situation, is that she kept referring to the contract that she signed stating that she was an independent contractor. My response to that argument is the simple fact that even contractually, you cannot impose your tax liability onto someone else—even if a contract is signed.
In a Tax Court case in 2012, John Keller, Action Auto Body v. Commissioner of Internal Revenue, the court applied both Treasury Regulations and IRC Sections to the case as to whether the auto body’s workers were employees or contractors.
Let’s review the common law factors of what makes someone an employee:
- The Degree of Control Exercised by the Principle
- Worker’s Investment in the Facilities
- Participation in Profit and Loss
- Right to Discharge Workers
- If Workers are Integral to the Business
- Permanency of the Relationship
- Taxpayer’s Presumed Relationship
If any of these common law factors are present, then you probably have an employee/employer relationship.
Earlier I stated something that I want to illustrate now. You cannot impose your tax liability onto anyone else. For instance, let’s say that I am getting divorced and the judge orders me to liquidate my retirement account to give half to my wife.
In the decree, it states that the taxes will be split between the husband and wife. Who is responsible for the taxes?
No matter what the decree says, I am the one that is going to receive the 1099 form at the end of the year. Since there is no such thing as a joint retirement account, in the eyes of the IRS, I am the one who is presumed to have received the tax benefit of putting the money into the retirement account. I am the one responsible for the taxes. I suppose I could then sue my former spouse for what would be her portion of those taxes. But just because the decree says the taxes will be split, that doesn’t mean the IRS will view it that way.
It is the same thing here. If my employer meets any of the above common law rules, they cannot impose their tax liability onto me. No matter what agreement I signed.
I don’t know about you, but I am filing more and more SS-8 forms with tax returns of clients that get 1099 forms because I am leaving it to the IRS to make that determination of worker status under common law rules.
So, when you see a client of yours that normally receives a W-2 form and they stroll in with a fistful of 1099s, take the time to ask some basic questions.
About Craig W. Smalley, EA
Craig W. Smalley, MST, EA, has been in practice for almost 23 years. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as representation before the IRS regarding negotiations, audits, and appeals. In his many years of practice, he has been exposed to a variety of businesses and has an excellent knowledge of most industries. He is the CEO and co-founder of CWSEAPA PLLC and Tax Crisis Center LLC; both business have locations in Florida, Delaware, and Nevada. Craig is the current Google small business accounting advisor for the Google Small Business Community. He is a contributor to AccountingWEB and Accounting Today, and has had 12 books published on various topics in taxation. His articles have also been featured in the Chicago Tribune, New York Times, Yahoo Finance, Nasdaq, and several other newspapers, periodicals, and magazines. He has been interviewed and been a featured guest on many radio shows and podcasts. Finally, he is the co-host of Tax Avoidance is Legal, which is a nationally broadcast weekly Internet radio show.