» Employee or contractor? New case muddles the issue

Employee or contractor? New case muddles the issue

February 3, 2009 by Carol Katarsky
Posted in: 1099s, Best practices, Hiring & training staff, In this week's e-newsletter, IRS regs, Latest news & views, Tax compliance

You’d think workers who set their own hours and don’t report directly to anyone at your company would be independent contractors. But you’d be wrong. In a recent case, the courts decided that a company was wrong to classify salespeople as independent contractors (ICs). The company has been ordered to to pay more than $90k in back employment taxes and penalties as a result.

The company treated its salespeople as ICs because the workers set their own hours, had no set territory and didn’t have to report back to the company on how or where they spent their time. The workers weren’t required  to provide written reports on their work, although some did so voluntarily.

Sounds as if the workers had control, right? But the court found that they were employees, in part because of the amount of support the company gave them. The company reimbursed the sales force for business expenses ranging from gas and hotels to advertising costs and photocopying. It also provided company-owned vehicles the salespeople used.

Because the salespeople had no ownership stake or personal investment in the tools and equipment used to perform their work, they were employees.

The company is currently fighting the assessment, arguing that, at minimum, it qualifies for Sec. 530 relief — for having made a good-faith effort to correctly classify the workers.

We’ll keep you posted as the case develops.

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