INDEPENDENT CONTRACTOR OR EMPLOYEE
FOR FEDERAL EMPLOYMENT TAX PURPOSES?
Public park and recreation agencies are time to time audited and assessed by the Internal Revenue Service for back taxes, as well as penalties and interest, for failing to pay federal employment taxes for individuals which the agencies had considered independent contractors. The following correspondence to the National Recreation and Park Association from a public park and recreation administrator effectively framed the issue:
The issue relates to a new aggressive position that the Internal Revenue Service appears to be taking with regard to contracted recreation instructors, coaches, officials that historically have been a part of parks and recreation delivery systems across the country.
Recently, IRS audited three year's of the City's records associated with the many individual service contractors which our division uses for hundreds of our leisure programs. The result of that audit concludes (at least in IRS's eyes) that the bulk of our instructors, coaches, officials, etc. should not have been individual services contractors, but rather employees of the city.
The initial IRS finding against the City for back FICA payments [i.e. Social Security taxes] worker's compensation, interest, penalties, etc. was $105,000. Obviously we are raising issue with their finding and hope to get that reduced. However, the fact remains that most parks and recreation agencies use individual service contractors and the IRS regulation on the subject is very vague and open to a variety of interpretations. It would be very valuable to have NRPA research this issue and provide the thousands of parks and recreation practitioners with information so that they can avoid any problems.
In response to this request, the NRPA Public Policy Division has assembled the materials contained herein to provide public park and recreation agencies with authoritative background information when addressing the issue of agency liability for federal employment taxes. The first of these materials contains the regulatory framework applied by the IRS in determining worker status, employee or independent contractor, for federal employment taxes.
This regulatory framework is followed by a series of Revenue Bulletins developed by the IRS to provide guidance to taxpayers on this issue of employee vs. independent contractor for federal employment taxes. The first, and perhaps the most significant, Revenue Bulletin described herein expands upon the preceding regulatory definition of "employee" providing a series of guidelines which define the employee relationship for federal employment tax. This 1987 bulletin describes twenty factors which can be applied to assess a particular employment situation in terms of the common law control test for employee vs independent contractor status. In addition, this bulletin introduces the section 530 "safe harbor" provision which exempts employers from employment tax liability under certain circumstances. (1)
These guidelines are followed by a series of complementary revenue bulletins involving sports officials (2), (3) golf pros (4), (5) and music instructors (6) which further delineates the control test as applied by the IRS in determining worker status for federal employment tax purposes. These revenue bulletins, as well as the regulatory framework, are based on precedent established in a 1947 United States Supreme Court decision, United States v. Silk. A case report of the Silk decision is contained herein. (7) Following this description of Silk, two federal appeals court decisions are reported which have applied the section 530 exemption to federal employment tax liability. Specifically, these two cases examine exemptions provided for (1) a long-standing recognized industry practice (8) and (2) prior IRS audits which have treated particular substantially similar workers as independent contractors. (9)
Of the two section 530 decisions, the case defining the section 530 exemption based upon industry practice is probably the most significant for public park and recreation agencies. In this particular instance, the employer taxpayer had treated miners as independent contractors. Specifically, this decision clearly illustrates the judicial analysis applied in determining a section 530 exemption for workers treated as independent contractors for federal employment tax purposes based upon a "long-standing recognized practice of a significant segment of the industry in which such individual was engaged." More importantly, however, this case indicates that the legislative purpose of the section 530 exemption is to be liberally construed in favor of the taxpayer employer.
Assuming public recreation agencies have filed "required tax or information returns" on such independent contractors for tax periods after December 31, 1978 (not required before this date), this decision would suggest that the section 530 safe haven provision for federal employment taxes would apply. As indicated above, the use of contractors to provide programs and services is a long-standing recognized practice among most public park and recreation agencies. Accordingly, in the event of an IRS assessment for federal employment taxes, public park and recreation agencies should be able to demonstrate a section 530 exemption given a thoughtful determination of worker status based upon the materials contained herein and the advice of agency counsel.