Mr. Robinson taught classes at Temple University that were part of its Criminal Justice Training Program. Temple said that Mr. Robinson was an employee. Mr. Robinson disagreed and treated himself as an independent contractor on his income tax return. In effect, there were contradictory forms filed with the IRS–a W-2 from Temple University and a Form 1040 from Mr. Robinson that included his income on Schedule C.
Guess what happened? If you say, an IRS examination, you get the prize.
Last week, the United States Tax Court filed its decision in Robinson v. Commissioner of Internal Revenue, discussing the age-old (or at least, fairly old) question: what makes a worker an employee or an independent contractor for federal income tax purposes.
The Tax Court noted that there are 9 factors that must be weighed in making the determination of employee vs. independent contractor status: (1) the degree of control exercised by the principal; (2) which party invests in the work facilities used by the worker; (3) the opportunity of the individual for profit or loss; (4) whether the principal can discharge the individual; (5) whether the work is part of the principal’s regular business; (6) the permanency of the relationship; (7) whether the worker is paid by the job or by the time; (8) the relationship the parties believed they were creating; and (9) the provision of employee benefits.
Of the 9 factors, the most important is the first–the principal’s degree of control over the details of the individual’s work. Generally, in order for a worker to be considered an employee, the principal not only controls the result of the work but also the means and method used to accomplish the result. However, the degree of control actually depends on the type of services the worker provides; if the work is such that the worker is more independent as a natural result of the type of work involved, a lesser degree of control by the principal still might result in a finding that the worker is an employee.
In this case, based on all the factors, the Tax Court found that Mr. Robinson was, indeed, an independent contractor as he claimed to be.
In all situations involving a determination of whether an individual is an employee or an independent contractor, it is important to consider all of the relevant factors, particularly that of control exercised by the principal. In the best of all possible worlds, the parties will agree on the nature of the relationship, but if not, one should not be surprised if the IRS comes calling to try and sort it out.