Tax Court Labels Bank Trustee an Independent Contractor, Must Pay Tax

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In a daily release of Tax Court opinions from the Court’s website, the Watson CPA Group learns that a bank trustee was considered an independent contractor, not an employee, and is responsible to pay self-employment taxes. The Court uses the bank’s lack of control over the trustee as the main test to determine the taxpayer’s status.

Tina Watson, CPA, MBA

employer-employee relationship exists when the business retains the right to direct how the work is done and controls the methods used in doing the work

In a Tax Court proceeding under Docket 9449-11 filed October 24, 2012, a bank trustee in Connecticut considered himself an employee of the bank, and therefore felt the bank was responsible for the associated payroll taxes. But the IRS contends he was an independent contractor, and therefore required to pay self-employment taxes. The Tax Court went through a seven point test to determine that the bank trustee was an independent contractor.

The Watson CPA Group highlights some of these criteria to ensure business owners and independent contractors are aware of the potentially dangerous swing in tax consequence. The crucial test revolves around the degree of control that a business has over an individual. According to court documents, an employer-employee relationship exists when the business retains the right to direct how the work is done and controls the methods used in doing the work.

The business does not have to actually direct or control the way the work is done. Retaining the right or exercising the right is considered the same thing in eyes of the Tax Court.

However, if a business can only control or direct the result of the work being done and not the means of accomplishing the result, then an independent contractor relationship exists. The IRS expands on the control aspect by adding types of instruction, evaluation system and training elements.

If a business can tell an individual when and where to do the work, what tools to use, what workers to hire, or the order or sequence to follow when performing the work, an employer-employee relationship will exist. The degree of instruction can also define the relationship. The more details or specifications provided will indicate the worker is an employee.

If an evaluation system measures how the work is performed, then an employee relationship could exist. However, if the same evaluation system only measures the end result, then the relationship is fuzzier and could lean towards the contractor side. Lastly, if a business provides training on how to do the job, this suggests that the business wants the job done in certain way. Repeated training events also strongly suggest an employer-employee relationship.

According to court records, the bank trustee had three factors favoring employee status and had four factors suggesting independent contractor. In the end, the Tax Court relied heavily on the degree of control that the bank exercised over the trustee. The bank had little control, and therefore the taxpayer was responsible for self-employment taxes.

The Watson CPA Group is a progressive tax consultation and preparation firm embracing internet technology to provide worldwide tax service from offices in Colorado Springs, Colorado USA. A secure online Client Portal allows remote taxpayers to exchange financial information, tax documents and tax returns saving valuable time and resources.

Since 1997, The Watson CPA Group prepares individual and corporate tax returns for a flat fee, and specializes in LLCs, small business and corporate taxes, pilot and flight attendant tax deductions, rental property owners and expat tax clients.

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Tina Watson, CPA, MBA
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