Tax Lawyer's Blog

McWhorter v. Commissioner of Internal Revenue- McWhorter didn’t file a tax return in 2002 during which he worked for a company that treated him for tax purposes as an independent contractor. McWhorter had worked for the company for four years and in each year had received a form 1099 rather than a form W-2.

McWhorter had worked for the company from 2001 through 2004 and had been treated by the company as an independent contractor in each of those years.

The IRS used the 1099 to prepare a substitute for return (SFR). McWhorter objected to the SFR and filed a tax court petition to dispute among other things, the IRS’s treatment of him as an independent contractor (subject to self-employment tax) rather than an employee.

Respondent relies on the test set out in Breaux & Daigle Inc. v. United States, 900 F.2d 49, 51 (5th Cir. 1990) (citing United States v. Silk, 331 U.S. 704, 716 (1947)), and the following factors: (1) Degree of control, (2) opportunities for profit or loss, (3) investment in facilities, (4) permanency of relation, and (5) skill required in the operation in question. The list is not exclusive, and no one factor is controlling. 

The IRS argued that because the company lacked control over McWhorter’s performance of his duties, that McWhorter’s relationship with the company was impermanent, and that his job required great skill, he should be treated as an independent contractor rather than employee.

The IRS also said that the agreement between McWhorter and the company that he be treated as an independent contractor rather than an employee should be given weight.

The Court seemed to be persuaded by the IRS’s argument that the Petitioner had agreed to the company’s treatment of him as an independent contractor and, in effect, had waived any right he might have had to claim that he was an employee:

Petitioner’s acquiescence in Boyle Energy’s treatment of him as an independent contractor for tax purposes is troubling.

But in spite of McWhorter’s acquiescence in his independent contrator status, the Court found,

On the limited record that we have . . . we conclude that petitioner was an employee of Boyle Energy during 2002 and should have been treated as such for tax purposes.

The Court noted that McWhorter would probably still be required to pay the employee’s share of the FICA tax (i.e. 7.65% of the amount considered wages):

The implication of our holding that petitioner was an employee of Boyle Energy for 2002 is that he may be liable for his share of taxes under the Federal Insurance Contributions Act, section 3101(a) and (b). That determination, however, is not within our jurisdiction in this case.

Warning to Employers: We have seen many cases where workers who were once perfectly happy that their compensation was not subject to the federal tax withholding requirements were later able to convince the IRS that they were employees all along. The fact your workers have agreed to be treated as independent contractors will not be the decisive factor should the relationship be scrutinized by the IRS or the Courts.

Warning to Employees:  We have seen many employers who want to save the matching FICA tax (also 7.65% of the employee’s wages) by treating their workers as independent contractors. They will file a form 1099 with the IRS and you will then be responsible for paying, in addition to your income tax, the 15.3% (2 x 7.65%) self-employment tax. If you don’t make a timely objection to this treatment, it will be more difficult for you to get it reversed later on. If the company insists on treating your employment in this manner, you should request additional compensation to account for the fact that you and not the company will be paying the company’s share of the FICA tax.

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