In a recent worker classification ruling SS8 2010030006 the IRS held that a part-time bookkeeper/general office worker was an employee and not an independent contractor. Generally the existence of an independent contractor relationship is based upon a 20 factor common law test set forth in Rev. Rul. 87-41, 1987-1 CB 298. Some of the factors the IRS took into account were:
The worker performed services at the payor’s place of business as well as her own home The payer provided all office supplies including telephone, fax machine etc., although the worker provided her own computer, and accounting software.
The bookkeeper was paid hourly The worker did not receive any benefits
The worker provided services for a period of about 2 years.
The payer’s had obtained a state ruling that the worker was an independent contractor.
The payer and the worker had an oral agreement whereby the worker agreed to independent contractor status The worker was trained by the payer on some of its proprietary software.
The worker did not hold herself out as being in an independent business.
As a tax attorney who has been through many payroll tax audits I know it can be difficult to prove that a worker is an independent contractor to the satisfaction of the Internal Revenue Service or the California Employment Development Department (EDD).
Nevertheless payers who are subject to a payroll tax audit have a variety of defenses including the so-called safe harbor provisions of Section 530 of the Revenue Act of 1978. This underused provision of the law allows for workers who fail the 20 factor common law test be treated as independent contractors provided the following requirements are met:
1. For federal employment tax purposes the payer never treated the individual as an employee for any period, nor did it ever treat workers holding substantially similar positions as employees;
2. All federal tax returns (including Form 1099) are filed on a basis consistent with the taxpayer’s treatment of the individual as not being an employee; and
3. A reasonable basis existed for classifying the individual as an independent contractor. Reasonable basis includes:
a. Reliance on judicial precedent or revenue ruling;
b. Previous IRS tax audit;
c. Long-standing recognized practice of a significant segment of the industry; or d. Any other reasonable basis.