A company which buys, repairs, reconditions, and resells used automobiles was forced to pay taxes in 2007 because its workers met all the requirements necessary to be taxed as employees.
The company in question consists of a President, who is the sole shareholder, Employee 1, who serves as the secretary and treasurer, and Employee 2, who is an automobile driver. The President and both Employees were treated as independent contractors, and the Company had no contractual agreements of any kind with any of them. The Company didn’t provide the Internal Revenue Service (IRS) or the three men with Forms 1099-MISC, Miscellaneous Income, reporting the compensation they received. As all three were considered independent contractors, the Company also didn’t issue Forms W-2 (Wage and Tax Statement), Forms 941 (Employer’s Quarterly Federal Tax Return), or Forms 940 (Employer’s Annual Federal Unemployment Tax Return). The Company also made no deposits of employment taxes for 2007.
The IRS determined that the three men should be classified as “employees” in a Notice of Determination of Worker Classification. After the IRS assessed additions to tax and penalties, the Company petitioned the Tax Court for redetermination.
The Tax Court upheld the IRS’s finding that the three men were “employees” rather than independent contractors, and that the Company was liable for employment taxes, additions to tax for failing to timely file returns, and a penalty for failing to deposit.
Under §3402, employers are required to pay “employment taxes” and income tax withholding, according to the court. The taxes are imposed by the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA).
The Tax Court found that, due to the services they provided the Company, the permanence of the employer-employee relationship, their opportunity for profit and loss, and the President’s control over both Employees , all three men fit the definition of “employee” as defined by §3121 and §3306 for FICA and FUTA purposes.
The Tax Court further concluded that because the Company failed to file timely returns and to pay or deposit the required employment taxes into any federal depository as required by §6651(a) and §6656(a) and §6656(b), the Company was subject to tax additions and penalties. Although it is possible for a taxpayer to avoid additions to the tax if the taxpayer can establish that the failure to file or deposit was due to reasonable cause and not willful neglect, the Tax Court held that the Company failed to meet the burden of proof in that regard.
Frankly, it is shocking to read that employers are silly enough to both (i) have fact situations like this and (ii) litigate them in Tax Court where they are certain losers.
Givner & Kaye focuses on sophisticated income tax planning and compliance, tax litigation and procedure, estate planning, and asset protection plans for individuals and businesses in Beverly Hills, Calabasas, West Los Angeles, Hollywood, and other areas of Los Angeles, Orange, Ventura, San Bernardino, Riverside and Santa Barbara Counties. Call Los Angeles Estate Planning and Asset Protection Plan Attorneys Givner & Kaye at (310) 207-8008 today.