Monday, August 29, 2016

Relief in Independent Contractor Issue

In the Nelly case the homecare companions were treated as independent contractors by the company.

IRS disagreed with the treatment and assessed back withholding and payroll taxes plus interest and penalties.  Nelly took the matter to Court stating it had a “reasonable basis” for making the independent contractor determination, therefore the assessment should be removed. The District Court granted the taxpayer the requested relief but didn’t rule on the workers’ employment v independent contractor status.  Here are some of the details of this case.

Nelly Home Care Inc. and its predecessor Nelly LLC (hereafter jointly called Nelly) provided non-medical homecare services to senior citizens.  Through its history Nelly contracted with up to 70 workers to provide homecare services.  Nelly promoted itself as a matchmaker between elderly customers and workers who provide homecare services.  A prospective customer contacted Nelly, which reviewed the workers in its registry to determine if any were available for the times and tasks requested by the prospective customer.

Section 530 of the Revenue Act of 1978 provides safe harbor relief for taxpayer who can show they meet any one of the following:

  1. Judicial precedent, published rulings, technical advice with respect to the taxpayer, or a letter ruling to the taxpayer;
  2. A past IRS audit of the taxpayer in which there was no assessment attributable to the treatment (for employment tax purposes (of the individuals holdings positions substantially similar to the position held by this individual); or
  3. Long-standing recognized practice of a significant segment of the industry in which such individual was engaged.

Nelly cited prior audits (#2 above) as a reason relief should be given.  The Court denied this reason since none of the prior IRS audits involved the employee v independent contractor status issue.

Nelly then stated it relied on “long-standing recognized practice of a significant segment of the industry” (#3 above).  Nelly stated it reached out to three other homecare service providers in the community and found out two of them treated their workers as independent contractors.  Nelly then had an attorney draw up an independent contractor agreement based on the agreement used by a competitor.  Later Nelly conducted a survey of additional home care companies and found seven of the twenty companies classified their workers as independent contractors.  The Court denied this reason since Nelly could not show that these firms constituted a significant segment of an industry.

Nelly stated it did not supervise or direct its workers in the performance of their duties.  The workers received no training from Nelly although Nelly did host orientation or in-service sessions for workers going into certain facilities.  Nelly also did not give directions to workers on how to care for clients and noted any specific instructions provided to workers were done by the host facility.  Nelly did carry worker’s compensation insurance on the workers.

Nelly was also told at a conference by the Pennsylvania Department of Health that her type of business was defined as a business that has independent contractors for the home care services.

Final result is relief for Nelly.  Regardless of Nelly’s failure to meet the safe harbor provisions shown above, the Eastern District Court of Pennsylvania looked at Nelly’s overall actions and determined Kelly was trying to accurately determine the workers’ true employee/independent contractor status.  The Court clearly said it was not ruling on whether the workers were employees or independent contractors.  The Court’s ruling only granted Nelly relief from the assessment stating Nelly exercised reasonable actions in trying make a proper determination.

Nelly Home Care, Inc., Nelly LLC, District Court for Eastern District of Pennsylvania, No 15-349 & 15-444, May 10, 2016.

This text has been shared with you courtesy of:  David & Mary Mellem, EAs & Ashwaubenon Tax Professionals, 920-496-1065 (920-496-9111).

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