Attorney-at-Law

NOT AN EMPLOYEE FOR TAX PURPOSES?

In Uncategorized on 05/24/2011 at 10:46

Not Exactly

So holds Special Trial Judge Dean in Michael Rosenfeld, 2011 T.C. Mem. 110, filed 5/23/11.

Mike was a self-employed public relations consultant, when he pitched the UK Consulate in Los Angeles for work. The Deputy Consul was so impressed he hired Mike for a three-year hitch as a full-time Trade Officer Grade US8. Mike’s engagement letter specified Mike “was required to work 40 hours per week and was not permitted to have outside business interests that could be furthered by virtue of his employment.” 2011 T.C.Mem 110, at p. 10.

The kicker is the engagement letter. That stated that Mike was “self-employed for tax purposes.” Mike took that to mean that his engagement with the Consulate was like any engagement with any client, so he wrote off his business expenses against his pay, and contributed to his SEP based on his business earnings from the Consulate.

STJ Dean goes through the eight factors for common-law employment vs. independent contractor status, and finds for IRS. The Consulate had enough command-and-control, on a fair preponderance of the evidence, to find for IRS, so denies both Mike’s attempts to introduce the UK Consulate Handbook as evidence, and to shift the burden of proof per Section 7491(a). The evidentiary points are of interest to trial counsel, but I leave it to them to parse these directly from the text of the decision.

Two main points: the engagement letter speaks louder than Mike’s uncontested but uncorroborated testimony. “Although petitioner alleged that he was not subject to the BCG’s direction and control, petitioner admitted that the head of the consulate could ask him to prepare or stop assignments and to attend conferences and meetings. His letter of appointment also specified that increases in his annual salary would be awarded only upon satisfactory service. Furthermore, contrary to petitioner’s assertions, the BCG did have the right to modify his employment arrangement. His letter of appointment explicitly stated that the BCG reserved the right to alter his conditions of service at any time.” [footnote omitted; emphasis added]. 2011 T.C. Mem. 110, at p. 9.

Although STJ Dean spends much time on the other seven factors, the letter of engagement is the key. And the Consulate reserves enough command-and-control to scuttle Mike’s ingenious but ultimately self-serving independent-contractor testimony.

What about the “self-employed for tax purposes” language in the letter of engagement? Oh, says Tax Court, that’s to do with payroll taxes; see Section 3121(b) and the Regulations. Employment by a foreign government is not “employment” for FICA and Medicare tax purposes, because IRS cannot levy on a foreign sovereign for its share of those taxes, so their US employees must file Form 1040-SE and pay those taxes. But the self-employment characterization is limited to FICA and Medicare, not income tax.

Mike also gets hit with the 6% excise for excessive contribution to his SEP. His Consulate earnings don’t count. Tax Court does an extensive analysis of Sections 401, 404 and 4979, which I leave to the specialists to decipher.

However, Mike does get a bye. Because for 25 years he had been self-employed, and used the same tax preparer, and because of the complex interface between the engagement letter, Section 3121(b), the Section 404 ramifications, and Mike’s ongoing work for other clients, STJ Dean finds for Mike on the Section 6662(a) accuracy-negligence-disregard penalty.

Takeaway? If you want independent contractor status, review your engagement letter very carefully.

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