Just one week after a worker classification decision rocked the stripping community, yesterday the Tax Court ruled that the masons and laborers used by a construction subcontractor were employees rather than independent contractors.
In Atlantic Coast Masonry, Inc. v. Commissioner, T.C. Memo 2012-233, an S corporation was wholly owned by James Dempsey and his wife. Dempsey would procure masonry jobs from general contractors, then hire a team comprised of a foreman, masons and laborers.
The masons and laborers were hired on a job-to-job basis; they worked 8 hours per day, provided their own tools, and Dempsey had the ability of fire them. Most of the masons and laborers worked exclusively for Dempsey.
On the corporate tax returns, Dempsey treated the foreman, masons and laborers as independent contractors. As a result, no payroll taxes were remitted on their behalf.
The IRS initiated an employment tax audit, challenging Dempsey’s worker classification.
As it tends to do, the Tax Court examined the following factors to determine whether the foreman, masons and laborers were employees or independent contractors:
- The degree of control exercised by the principal over the details of the work;
- Which party invests in the facilities used by the worker;
- The opportunity of the worker for profit or loss;
- Whether the principal can discharge the individual;
- Whether the work is part of the principal’s regular business;
- The permanency of the relationship; and
- The relationship the parties believe they were creating.
Based on the foregoing factors, the court held that the individuals hired by Dempsey were all employees, rather than independent contracts. The decision was based primarily on Dempsey’s ability to control and approve the quality of the laborers’ work (factor 1), the inability of the workers to generate profit or loss depending on the results of the project (factor 3), Dempsey’s ability to fire the workers (factor 4), and the fact that the workers were an integral part of the normal operations of the S corporation (factor 6).
The lesson? As always, proper classification of a businesses’ workers is critical. Dempsey was ultimately held responsible for nearly $500,000 in additional payroll taxes and over $200,000 in related penalties.