ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – THE TAX COURT DECIDES WHO IS A STATUTORY EMPLOYEE – GUIDELINES FOR BOTH THE IRS AND THE EDD
By Robert S. Schriebman
Is it possible for the president of a corporation to escape from being classified as a statutory employee? On April 11, 2022, the US Tax Court issued its decision in The Redi Foundation Inc. v. Commissioner, TC Memo 2022-34, April 11, 2022. The Court dealt with the issue of whether a corporate president can be treated as an independent contractor.
Richard M. Abraham (Abraham) is a nationally known real estate developer and an author. He also lectures extensively on real estate development. He created The Redi Foundation, Inc. a non-profit primarily in the business of conducting real estate development seminars and selling books written by Abraham. Mr. Abraham does not like the idea of paying payroll taxes on his compensation. He had the Foundation treat him as an independent contractor in order to avoid having to pay payroll taxes to the IRS. The IRS conducted an audit and assessed the Foundation payroll taxes on over $255,000 of salaries, other compensation and employee benefits of close to $92,000. Abraham took the IRS to the US Tax Court and raised the following issues:
- Is Abraham a statutory employee?
- Does the minor services exception apply to allow Abraham to be an independent contractor?
- Is the Foundation entitled to Section 530 Safe Harbor Relief?
These issues also govern how the EDD classifies corporate officers, and how the EDD auditors analyze the worker status of corporate officers.
Is Abraham a Statutory Employee?
Subtitle C of the Internal Revenue Code governs payment of employment taxes. IRC § 3111 imposes payroll taxes on wages paid to employees. The term “wages” encompasses all remunerations for employment. “Employee” is defined for purposes of payroll taxes to include “any officer of a corporation.” IRC § 3121(a). IRS Regulations clarify the scope of the inclusion for corporate officers as follows:
“Generally, an officer of a corporation is an employee of the corporation. However, an officer of a corporation who as such does not perform services or performs only minor services and who neither receives nor is entitled to receive, directly or indirectly, any remuneration is considered not to be an employee of the corporation.” Treas. Reg. §§ 31.3121(d)-1(b).
IRS Regulations have the force of law as though they were written by Congress.
Occasionally, a corporate officer can operate in a dual role as both a statutory employee and an independent contractor. These cases are rare, but they do exist. It is much easier to convince an IRS auditor that a corporate officer may occasionally be an independent contractor…but try to convince an EDD auditor! There is one well-known case where a corporation’s president of a radio broadcasting company received a W2 as president and a 1099 as an independent contractor for selling advertising on his off hours.
The Tax Court found that Abraham was the sole person in charge of the day-to-day operations of the Foundation and oversaw online courses which was the only business activity of the Foundation. He necessarily provided a wide variety of services to the Foundation including managerial decisions about the content, marketing, and enrollment of online courses. Therefore, the Tax Court found him to be a statutory employee.
Does the Minor Services Exception Apply to Allow Abraham to Be an Independent Contractor?
A corporation officer may be treated as an independent contractor only if only minor services are provided. This is a question of examining the facts and circumstances. Abraham devoted more than 60 hours per week on course material and was the sole teacher of the courses offered by the Foundation. Therefore, the minor exception does not apply.
Is the Foundation Entitled to Section 530 Safe Harbor Relief?
Abraham argued that the Foundation is entitled to relief under Section 530 of the Revenue Act of 1978 – the safe harbor exception. To be eligible for relief, one must show a reasonable basis for treating a corporate officer as an independent contractor. There are several criteria used to establish a reasonable basis. One is a long-standing industry practice. It is well established that the scope of Section 530 relief is limited to common law worker classification determinations. Congress did not intend for relief to be available in situations where a corporate officer is already classified as an employee by statute. Because Abraham is classified as a statutory employee under IRC § 3121, safe harbor relief is not available to him. The EDD does not recognize the safe harbor exemption.
Any time you have a corporate officer classification in issue, both the IRS and the EDD will automatically conclude that the officer is a statutory employee. There are rare exceptions and a few cases where the officer may be both an employee and an independent contractor.
Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 50 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
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