Independent Contractors or Employees?

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In my continuing effort to keep you advised of the differences between independent contractors and employees, We've found another Tax Court case. This case involves massage therapists. Here's the story:

Tax Court Case 1: Massage Therapists

Massage therapists, cosmetologists, and nail technicians (service providers) operated on the premises of a spa. They were charged a weekly "booth rent" equal to the greater of about $80 or 25% of the individual's gross revenue. Some worked full-time, others part-time.

Sometimes the owner did not charge booth rent if the service provider was new, and sometimes booth rent wasn't charged if the service provider was absent for a week. Service providers were free to come and go as they chose; most had keys to the spa.

Clients made appointments with a receptionist. Clients could request a specific service provider; others requested time and were given an available service provider. Payments were made at the front desk and were recorded for each service provider.

Some service providers were given written agreements, some were not. They were required to hold specified licenses, and they paid for their own training.

Service providers could charge whatever rate they wanted and were free to give discounted or free services. Service providers provided their own supplies, or they could purchase them from the spa.

No W-2 forms (for employee wage reporting) were filed for service providers, and no compensation was recorded on Form 941 (Employer's Quarterly Employment Tax Report) for the years in question.

The Tax Court's Decision

The Tax Court determined that the service providers were not employees, but were independent contractors, concluding that:

factors indicating the service providers' autonomy predominate over factors indicating petitioners' control over them.

The factors that the IRS uses to determine whether a worker is an employee or independent contractor are all in the "independent contractor" column, in this case; for example, payment, providing own supplies, determining own hours, paying for own education, and determining amounts charged to customers.

 Tax Court Case 2: The Case of the Trucking Company

The company (we will call it "P Trucking") owned the trucks, which were leased to another company. P Trucking was required to provide the drivers, and to direct, supervise, pay, discipline, and discharge them. P Trucking determined the days and hours per day the drivers worked, and the order of pickup and delivery. The company also had to monitor the drivers' commercial driver's licenses.

P Trucking's agreement with each driver expressly stated that the driver was an independent contractor, not an employee and that P Trucking "shall not direct [the driver] in any manner." P Trucking paid the drivers a percentage of the gross pay per load. They were not obligated to work on any day or route, and the agreement could be terminated by either party at any time. The drivers paid for their own gloves, hand tools, meals, and tolls. P Trucking paid for the trucks and for all associated truck operating and maintenance costs. P Trucking did not direct the exact routes the drivers took, as long as the deliveries were made. The drivers agreed to be responsible for the payment of income taxes, social security/Medicare, and unemployment compensation; they received a Form 1099 from P Trucking.

Here are the factors the Tax Court reviewed in making its determination:

  • Control. P Trucking was in control of the drivers' work. The only choices made by the drivers were the choice of routes and their payment of tolls. The Tax Court said P Trucking had the right to control driver work, even if it didn't exercise that right in some cases. The Court said this factor indicated employee status.
  • Ownership of work tools and equipment. The drivers did not own the trucks or any other equipment needed for their work. The drivers only owned their tools, which the Court said was "insignificant" compared to the cost of the trucks. This factor also indicated employee status.
  • Risk of Loss (Investment or Debt). The drivers had no indebtedness since they had no ownership. Nor did they have any investment in the business which they would be at risk of losing. This is a major factor in favor of employee status.
  • Right to terminate. P Trucking had the right to terminate the relationship at any time, as did the truckers. The Court said this factor showed that the truckers were employees.
  • Work Integral to Business. The work of independent contractors is often peripheral to the business; for example, a computer company would hire a cleaning service (independent contractor). Since the work of the drivers was integral to the business, the Court stated this indicated an employer-employee relationship.
  • Nature of Relationship (permanent or transitory). Independent contractors have a transitory relationship to a company, working only occasionally, not on a regular schedule. The drivers were permanent workers, working all the time, even though they had the right to refuse jobs. The Court stated this as another factor indicating they were employees.
  • Existence of agreement. The Tax Court noted the written "independent contractor" agreement between P Trucking and the drivers, but it said the agreement was overridden by the other factors.

Determination of the Court

As you can guess by their statements on each point, the Tax Court found that the drivers were "common law employees" and that the payments made to them were wages and subject to federal employment taxes. Note that the existence of a contract is not enough. The IRS and the Tax Court look at many factors in making a determination of employee or independent contractor status.


The information in this article and on this site is for general purposes and is not intended to be tax advice. The IRS and the Tax Court consider each case on its own, and every case is different. If you are wondering if your workers have been misclassified, you can request an IRS determination by filing Form SS-8.


T.C. Memo 2010-239, T.C. Memo 2007-66