Tax Court rules on employee determinations


The Tax Court recently decided in two unrelated cases that, in one case, nurses hired for in-home care and, in the other case, the founder of a nonprofit company all were ruled to be employees rather than independent contractors.

In Pediatric Impressions Home Health, Inc. v. Commissioner (No. 5769-20), the Tax Court used the U.S. Court of Appeals for the Fifth Circuit’s non-exhaustive five-factor test to determine that the relationship between an at-home care business and its nurses was best characterized as a common law employment relationship. While the IRS uses a 20-factor test in determining whether a service provider is an employee, the Fifth Circuit’s posture as the court to which an appeal would lie influenced the Tax Court’s use of the pertinent five-factor test.

The Tax Court also ruled in The REDI Foundation, Inc. v. Commissioner (No. 23715-18) that the founder and treasurer of a nonprofit was a statutory employee of the nonprofit. The court relied on the Treasury regulations’ inclusion of corporate officers within the scope of the Section 3121(d) definition of “employee” in reaching its conclusion.

In both cases the court held that the service providers were subject to FICA, FUTA, and income tax withholding as employees. The determination of employee versus independent contractor is expected to come under increasing pressure as workforce arrangements evolve, and the two cases provide important insight into how the Tax Court will analyze the issue.



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