Tax Court Rules That Independent Contractor for the US Dept of State Is An Employee

Employee v. Contractor

In this Tax Court Case, there was the taxpayer and the IRS. The taxpayer was working for the federal Department of State under a personal service contract or PSC. The PSC clearly dictated essentially every detail of the work relationship. The relationship was such that the taxpayer showed up at a specific time, compensation, and guidelines for leave accrual and use. The taxpayer was classified, by the Department of State as a contractor for federal tax purposes. In Tax Court and through pleadings the IRS asserted the taxpayer was an employee and should be classified as such. Looking at the elements on the terms of the PSC, every duty the taxpayer had was clearly outlined. The taxpayer made no opposite claim, other than to assert which elements were not met in order to be an employee rather than a contractor.

The Court determined that the taxpayer was in fact, an employee due to the facts stated above regarding time, compensation and leave. The Court also pointed out that the taxpayer, now employee, did not work for anyone else and there was no risk in the relationship pointing to a more employee status as opposed to a contractor status. Penalties were not assessed for the three-year period.

Editor’s Comment

This is an interesting contractor v. employee case because it involves an institution of the federal government itself. That institution being the Department of State. It demonstrates that it is not only the private taxpayer / small business that is getting this classification wrong. I would recommend to anyone with independent contractors to review their situation and reclassify their workers if need be.

By: Basi and Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors