This firm finally found that out.  Oh, sure, they thought they had the rules down pat.  They figured they’d been following Section 530- but, it turns out not as carefully as they thought.

If one has an employee, the employer is responsible for paying social security and Medicare taxes on their income.  And, is responsible to withhold and transmit social security, Medicare, and income taxes from the employees wages directly.  And, then, there’s the unemployment insurance bills.

But, if one is not an employee, then as a contractor, that person must pay his or her own social security, Medicare, and income taxes.  And, is not guaranteed any benefits like vacation, sick pay, or insurance.  Obviously, the employer can save a great deal of money if the individual is classified as a contractor and not an employee.

What separates the two?  How does the IRS classify a worker as an employee?  If the employer controls the services (a contractor must work independently). Even if the IRS decides a worker is an employee, there is a “safe harbor rule” (Section 530).

Section 530 (IRS Tax law of 1978) has the following exemptions:

• If the employer never treated this individual as an employee and doesn’t do so for other folks performing similar duties.
• Tax returns have consistently demonstrated that the employer treats the individual as a contractor
• The employer has a reasonable basis for classifying the individual as a contractor. (Surviving a previous audit would be one such basis.)

Now, for this case.  Pediatric Impressions Home Health (in TC Memo 2022-35, 12 April 2022), a Houston based employer, supplies nurses for private services in client homes.  But, Pediatric Impressions exerts significant control over the nurses, setting their work schedules, training them in their duties, provide all supplies needed, and even provides these nurses with insurance.

That was  just a little too much control.  And, the Tax Court agreed with the IRS.  So, Pediatric Impressions tried to claim Section 530 relief.  But, oops!  It didn’t provide 1099s for all these nurses. And, the training and work schedule just was over the top.

So, the ruling that these nurses were employees (and back employer taxes were due) held.

If you plan to keep folks as contractors and not employees, watch that degree of control!

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