Summary of a Recent
Judicial Development in
Labor

Tax Liability for Misclassification of Workers as Independent Contractors

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In U.S. v. Porter, 569 F. Supp. 2d 862 (S.D. Iowa 2008), the United States District Court for the Southern District of Iowa, Southern Division granted in part and denied in part the government's summary judgment motion concerning unpaid employment and unemployment taxes stemming from an employer's misclassification of his workers as "independent contractors."

Background

The defendant's company manufactured and sold nutritional products for swine, dairy, and beef cattle, and hired several salesmen to sell the products. Id. at 863. The defendant treated the salesmen as independent contractors, but the government determined them to be employees for tax purposes filed a complaint against the defendant for unpaid employment and unemployment taxes. Id. at 863-64.

Arguments

The government argued it held valid federal tax liens on certain parcels of real property belonging to the defendant and his wife, so it was entitled to foreclose its liens on these parcels, and moved for summary judgment. Id. at 864.

The defendant argued that summary judgment was not proper because genuine issues of material fact existed regarding, inter alia, whether: (1) there was a statute of limitations issue, (2) he was entitled to relief under Section 530 of the Revenue Act of 1978, and (3) he had a reasonable basis for treating the salesmen as independent contractors. Id.

Analysis and Holdings

Statute of Limitations
Under U.S.C. § 6501(a), tax assessments generally must occur within three years after the tax return for the particular tax period was filed. Id. at 866. However, Defendant had signed a consent to extend the assessment periods for the years at issue, so the court concluded there was no statute of limitations issue. Id. at 867-68.

Classification of Workers
Common law governs whether an individual is an "employee" or an "independent contractor" for federal tax purposes. Id. at 868-69. After considering all the relevant factors, including the degree of control Defendant had over the salesmen, the training, compensation and benefits provided, and the salesmen's work schedules, the court concluded there was sufficient evidence to support the government's determination that the salesmen were employees and not independent contractors. Id. at 869-74.

Revenue Act of 1978 § 530 Relief
Section 530 of the Revenue Act provides a safe harbor for employers who had, in good faith, misclassified their workers and thus failed to properly withhold employment taxes. Id. at 874-75. "Section 530 applies if (1) the taxpayer does not treat a worker as an employee for employment tax purpose during a particular period; (2) the taxpayer files all required federal employment tax returns on a basis consistent with this treatment; and (3) the taxpayer has a reasonable basis for not treating the worker as an employee." Id. at 875. The court found that summary judgment in favor of the government on this issue was not appropriate as there were multiple issues of material fact concerning whether the defendant qualified for § 530 relief. Id. at 875-79.

The case was decided on August 4, 2008.