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Are Your Workers Classified Properly? Employee vs. Independent Contractor

Posted by attorney Mark Campanella

In the Internal Revenue Services’ ongoing effort to ensure that all employees are properly classified, the IRS recently tackled a classification issue involving a construction business. The concern raised in Atlantic Coast Masonry, Inc., TC Memo. 2012-233, was essentially one where a masonry subcontractor paid its workers as independent contractors. As such, the subcontractor did not withhold payroll taxes or pay the required employment taxes for his workers.

After the IRS declined to honor the classification, the subcontractor, which is a s-corp, challenged the ruling in Tax Court. Proper worker classification as either employee or independent contractor comes down to a specific common law analysis concerning the degree of control exercised over a particular worker. In this particular matter, the subcontractor argued for independent contractor status for its workers based on the fact that its workers provided their own tools and were free to seek employment as masonry workers with other businesses.

Despite recognizing that the two aforementioned common law tests came out in favor of the subcontractor’s classification of its workers, the Tax Court nonetheless declined the challenge. The Court determined that the subcontractor still possessed a requisite level of control over its workers that allowed it to both instruct them on their jobs and approve the quality of their work. Such being the case, the Tax Court determined the workers were properly classified as employees.

The important lesson to take away from this ruling is that every business should have a firm grasp on the proper classification of its workers. Determining whether a worker is an employee or an independent contractor often times boils down to a careful analysis of the common law factors considered by the IRS. If there is a question as to a worker’s proper classification, always be sure to consult a professional before proceeding.

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