In John Keller, Action Auto Body v. Commissioner, T.C. Memo 2012-62, the U.S. Internal Revenue Service reclassified ten workers at an auto repair shop as employees instead of independent contractors as the shop had claimed. The IRS issued a notice of determination that the individual who operated the shop was liable for employment taxes that it should have withheld, plus penalties. The auto shop owner contested the IRS’s notice in the tax court.
To determine whether the workers were employees from whose wages the auto shop/principal should have withheld payroll taxes, the tax court reviewed the circumstances regarding each worker’s relationship with the taxpayer in light of the following factors: (1) the degree of control exercised by the principal; (2) which party invests in work facilities used by the worker; (3) the opportunity of the worker for either profit or loss; (4) whether the principal can discharge the worker; (5) whether the work is part of the principal’s regular business; (6) the permanency of the relationship; (7) the relationship the parties believed they were creating; and (8) the provision of non-monetary benefits.
The court found that seven auto shop technicians (providing repair and painting services) covered by the IRS’s notice were actually independent contractors as to whom the auto shop was not required to withhold taxes. The court emphasized that (1) there was no evidence that the shop actually controlled the technicians’ work; (2) the technicians’ compensation depended in part on commissions from work for customers they recruited; (3) the auto shop’s main function was to estimate repairs for an insurance company and then refer vehicles to the workers for repairs; (4) auto body repair workers tended to have transitory relationships with the shop; and (5) the shop provided the workers no benefits.
The court agreed with the IRS that three of the auto repair shop’s office workers, who provided repair estimating and secretarial services, were employees from whose pay the shop should have withheld payroll taxes. As to those employees, the court found that the shop operator did not have reasonable cause for failing to make deposits required by law or to pay in a timely manner tax for the employees. Accordingly, the court found the shop operator liable for the unpaid tax, plus penalties, plus the addition to tax provided for by Internal Revenue Code § 6651(a)(1).