by Ned Lenhart
Over the years I’ve worked with many companies who use “contractors” to perform a lot of the work they do. Given the control these companies have over these so-called “independent contractors,” I’ve always been concerned that they are really “employees.”
On February 23, 2013, the U.S. Tax Court issued Kurek vs. Commissioner, T.C. Memo 2013-64 and held that a general contractor who used laborers to complete his work had improperly classified them as “independent contractors” and that they were really “employees.”
Even though the workers provided their own tools and set their own schedule, the general contractor set deadlines for the work and monitored their work on a daily basis. Further, he paid them on a weekly basis and had the ability to approve the quality of their work. The Tax Court held that these factors made these workers “employees” and not “contractors.”
The implications of this decision are extensive and include workers’ compensation insurance, unemployment insurance, FICA, and now healthcare coverage.
Over the years we have seen situations that are similar to this fact pattern, especially in the construction industry. If your company uses “subcontractors” or other laborers to complete projects, please review this ruling carefully and evaluate the potential consequences. The ruling could also have implications on state and federal income tax withholding rules. The penalties associated with these violations can be significant.
Ned Lenhart is President of Interstate Tax Strategies, a multi-state sales and use tax advisory firm based in Atlanta. To learn more about ITS, visit http://www.salestaxstrategies.com.