The issue of whether the worker is an employee or an independent contractor (business owner) is constantly litigated and argued.
The Tax Court recently found that an S corporation failed to treat (report) as employee workers who lived on the farm where they performed their duties. The court also upheld the IRS determination of various employment tax liabilities.
Wages paid to farm workers are subject to Social Security and Medicare taxes as well as federal income tax withholding. That applies for wages paid of $150 or more in a year for farm work. It also applies if the total cash and non-cash wages paid to all farm workers is $2,500 or more in a year.
This particular S corporation operated a horse farm and engaged the services of two workers. The workers lived on the farm, groomed the horses and performed other duties of the business.
The court found the degree of control exercised by the owner to be a factor in determining that the workers were employees. Also, the workers had no opportunity to make a profit or loss, so they were found to not be in "business." The relationship was not casual or temporary. That also indicated "employee" status. The owner of the S corporation personally supervised the workers and supplied the equipment to be used in the work.
The court looked at the facts and circumstances and decided the workers were employees. That meant the corporation owed a lot of payroll taxes, related penalties and interest, as well as other payroll items like worker's compensation insurance, etc.
The various payroll services available now will handle payrolls for just two employees. They do a good job and the fees are not that high. The QuickBooks business records program also makes doing payroll tax reports fairly easy.
The easy way to decide whether a worker is an employee is to consider who really controls.
We urge the parties to have a written agreement that sets forth the kind of relationship they agree to have.
Some industries have special rules on determining who is an employee. It's worth the time and trouble to look at this, before it gets to be a big problem. If no returns for payroll taxes are filed, the statute of limitations is always open. That means all back years are open for IRS audit and assessment.
IRS Form SS-8 is available online (irs.gov forms). Look at that form to see if your situation walks and talks more like an employee or not.
Did you hear, "Dollars do better if they are accompanied by sense." - Earl Riney
• John Bullis is a certified public accountant, personal financial specialist and certified senior adviser, serving Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs, LLC.