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Masons and laborers who performed services for an S corporation were employees, rather than independent contractors, and the U.S. Tax Court found the S corporation was therefore liable for employment taxes and penalties.

S Corporation Liable for Employment Taxes for Workers Classified as Employees

  • 8/22/2012

S Corporation Liable for Employment Taxes for Workers Classified as Employees

Masons and laborers who performed services for an S corporation were employees, rather than independent contractors, and the U.S. Tax Court found the S corporation was therefore liable for employment taxes and penalties.

The S corporation acted as a subcontractor providing masonry services using the services of numerous workers. Following the reclassification of the workers, the IRS determined deficiencies and imposed additions to tax for failure to file returns and pay taxes in a timely manner, and penalties for failure to deposit employment taxes.

The taxpayer used the services of a number of masons and laborers, each of whom was retained and paid on a per-job basis. The court reviewed factors relevant to determining employee status, including:

  1. The degree of control exercised by the principal over the details of the work
  2. Which party invests in the facilities used by the workers
  3. The opportunity of the worker for profit or loss
  4. Whether the principal can discharge the worker
  5. Whether the work is part of the principal’s regular business
  6. The permanency of the relationship
  7. The relationship the parties believe they were creating

Factors 1, 3, 4, and 5 weighed in favor of an employee classification, factor 6 weighed in favor of an independent contractor classification, and factors 2 and 7 carried no weight.

The taxpayer sought relief under the Revenue Act of 1978, P.L. 95-600, Sec. 530, which allows relief from reclassification of workers if:

  • The taxpayer did not treat the workers as employees.
  • The taxpayer consistently treated the workers as nonemployees on all tax returns.
  • The taxpayer had a reasonable basis for not treating the workers as employees.

Since the taxpayer did not file required information returns, including Forms 1099-MISC, with the IRS for any of the workers in question, the requirements for Sec. 530 relief were not met, and the taxpayer did not qualify for relief.

The taxpayer was liable for all assessed additions to tax and penalties because it failed to show reasonable cause for:

  • Failure to timely make the proper return filings under Code Sec. 6651(a)(1).
  • Failure to timely pay the amounts of tax shown on the returns under Code Sec. 6651(a)(2).
  • Failure to timely make the required deposits under Code Sec. 6656(a).

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