The U.S. Tax Court has held that an office manager at a physician's office was an employee, and additionally the physician did not qualify for employment tax relief pursuant to Section 530 of the Revenue Act of 1978 (T.C. Memo 2023-64, 5/18/2023).
Petitioner, Cardiovascular Center LLC, (CVC) operated a limited liability company with Dr. Frank Kresock as its sole member. CVC was treated as a disregarded entity for federal tax purposes, with its income and deductions reported on Dr. Kresock’s personal tax returns. Janine Smith worked at CVC with Dr. Kresock in his medical practice as the office manager and as a registered health information technologist. Four other CVC employees worked as medical assistants.
The employees were paid on a biweekly basis, with a cashier’s check signed by Kresock pursuant to an "employee" time sheet they signed. The timesheets were approved by Smith. The workers were paid an hourly wage. The workers often worked in excess of 70 hours, and were paid overtime as required. However, Smith was not issued regular paychecks. Rather, Kresock paid her personal bills, including mortgage payments on homes titled in her name, since Kresock and Smith resided together.
All of the workers were supervised by Kresock, and followed office procedures that were established by Kresock and Smith. None of the workers realized a profit or loss because of their job, and there were no formal employment contracts. The workers determined their own schedules, where they were permitted to arrive and leave, at any time.
CVC did not file or furnish Form 1099-MISC, Miscellaneous Income, or W–2, Wage and Tax Statement, reporting the compensation paid to the workers, nor did it file any associated employment tax returns (Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, and Form 941, Employer’s Quarterly Federal Tax Return) for the tax periods at issue.
The Tax Court considers a worker’s employment status by applying common law concepts, which, in this case, included the following factors:
- the degree of control exercised by the principal over the worker;
- which party invests in the work facilities used by the worker;
- the worker’s opportunity for profit or loss;
- whether the principal can discharge the worker;
- whether the work is part of the principal’s regular business;
- the permanency of the relationship; and
- the relationship the parties believed they were creating.
The Tax Court notes that no single factor is dispositive and that all facts and circumstances must be considered.
After consideration of the record and the relevant factors, the Tax Court concluded that the relationship between CVC and Ms. Smith, and CVC and the workers is best characterized as an employment relationship. According to the Court, the critical factor of whether CVC exercised control over the workers was met. Additional factors such as the investment in the work facilities used by the workers, the workers’ opportunities for profit or loss, whether the work was part of CVC’s regular business, and the permanency of the relationship all led significantly in favor of the finding that this was an employment relationship.
Section 530 provides relief from federal employment taxes even if the relationship between the business and the worker would otherwise require the payment of those taxes.
To qualify for the relief, a taxpayer must:
- not have treated the worker as an employee for tax purposes (historic treatment requirement);
- must have filed all federal tax returns (including information returns) with respect to the worker for periods after 1978 on a basis showing the worker's treatment as a non-employee (reporting consistency requirement);
- must have had a reasonable basis for not treating the worker as an employee, (reasonable basis requirement); and
- must not have treated as an employee any individual holding a position “substantially similar” to that of the worker in question (substantive consistency requirement).
The tax court found that CVC failed to prove the reasonable basis requirement, and failed to satisfy the second requirement of section 530 because it failed to file Forms 1099-MISC for the tax periods at issue.
The court therefore determined that CVC was not entitled to section 530 relief, and was liable for the federal employment taxes reflected in the notice of determination.
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