INDEPENDENT CONTRACTOR OR EMPLOYEE

Independent contractor or employee. This issue comes up with companies that we have dealt with over the last 32 years. Often, companies incorrectly classify an employee as an independent contractor, hoping to avoid payroll taxes and health insurance obligations. This is trend has swept through the ranks of corporate America over the last 30 years and has caused numerous companies to end up with rather large payroll tax debts and re-filing tax corporate tax returns obligations. Making sure you make the proper classification, if you are a business entity, is crucial so you don’t end up with a tax mess down the road. The current issue before us is another court case highlighted for our ongoing coverage of Tax Court issues. Independent contractor or employee.

Bradley M. McGuigan and Shirley W. McGuigan, Petitioners v. Commissioner of the Internal Revenue Service. The issues before the Tax Court were whether he was an independent contractor or statutory employee entitled to report expenses on Schedule C, Profit and Loss from a Business, or a employee on Schedule A, and whether petitioners are entitles to to deductions for legal and professional expenses, insurance, and rent for vehicles, machinery, or equipment, and whether petitioners are liable for the accuracy related penalty.

On February 17, 2017, respondent mailed petitioners a notice of deficiency with respect to tax years 2014 and 2015, disallowing their Schedule C deductions for legal and professional fees, insurance and rent expenses. Respondent also recharacterized petitioners remaining Schedule C deductions as unreimbursed employee expenses and moved them to Schedule A for each year at issue.

An individual performing services as an employee may deduct expenses incurred in the performance of services as an employee as miscellaneous itemized deductions on Schedule A to the extent the expenses exceed 2% of the taxpayers adjusted gross income.

This particular taxpayer filed the returns themselves. As a result they ended up with a tax burden, interest and penalties, and having to refile multiple years of tax returns, not to mention all the wasted time involved. It would have been cheaper to hire a seasoned tax professional, than having to search through Tax Resolution Companies for a good one.