Tax Type
Employer Income Tax Withholding
Description
Withholding definitions, employee defined
Topic
Persons Subject to Tax
Withholding of Tax
Date Issued
10-10-1996
October 10, 1996
Re: § 58.1-1821 Application: Withholding Tax
Dear*****************
This will reply to your letter in which you applied for correction of an assessment for withholding taxes to************ (the "Taxpayer") for the periods January 1, 1989 through November 30, 1994. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a transportation firm who was subject to a field audit. For the periods January 1, 1989 through November 30, 1994, the Taxpayer was assessed tax, penalty, and interest for failure to withhold taxes from office personnel, shop workers, and certain truck drivers. You contend the Taxpayer is not required to withhold taxes from certain truck drivers whom the Taxpayer classifies as independent contractors.
Transportation services are provided by the Taxpayer utilizing two different methods for fulfilling contractual obligations. At various times, the Taxpayer subcontracts its obligations to other transportation companies or owner/drivers who provide both the drivers and equipment necessary to perform requisite duties ("Group A"). In other instances, the Taxpayer provides the equipment and the drivers necessary to perform such duties ("Group B"). At issue here is whether an employee/employer relationship exists between the Group B drivers and the Taxpayer.
DETERMINATION
Code of Virginia § 58.1-460 defines "employee" as, "[A]n individual, whether a resident or a nonresident of the Commonwealth, who performs or performed any service in the Commonwealth for wages ...." The Code of Virginia does not define "independent contractor" for withholding tax purposes. Nevertheless, federal law provides certain factors to distinguish between an employee and an independent contractor.
Treasury Regulation § 31.3121(d)-1 provides these factors, and is summarized in Internal Revenue Service Publication 937. The 20 factors enumerated in this publication are used as a guideline for determining whether a worker is an employee or an independent contractor. These items, however, are not the only elements considered when determining the classification of workers.
When the Taxpayer subcontracts shipments to other transportation companies or Group A owner/drivers, these independent operators choose the route traveled, maintain the equipment, assume responsibility for insuring the load and are liable if unable to perform their duties. These organizations have a significant investment in the business, assume the burden of profits or losses, and offer their services to the general public. Additionally, they have the ability to accept additional shipments en route as long as these shipments do not interfere with the original contract. Using the aforementioned 20 factors, Group A drivers meet the definition of independent contractors and are excluded from the assessment calculations.
In contrast, the Group B drivers secured by the Taxpayer were directly controlled by the Taxpayer while so employed, did not assume liability for the load or the equipment, did not have a significant investment in the business, and did not make a profit or suffer a loss from the business. While the tasks may not have been performed on the premises of the business, they were performed on a route or at a location designated by the Taxpayer, in a time period specified by the Taxpayer, and in Taxpayer provided trucks, trailers and other necessary equipment. These drivers were reimbursed for various expenses incurred during the shipment and were required to submit travel records to the Taxpayer upon completion of the delivery. Taking all these components into consideration, an employee/employer relationship is deemed to exist between the Taxpayer and the Group B drivers.
The term "employer" is defined by Code of Virginia § 58.1-460 as "[T]he person . . . for whom an individual performs or performed any service as an employee ...." Code of Virginia § 58.1-461 provides that employers must withhold taxes on wages of employees. Accordingly, the office personnel, shop workers, and Group B truck drivers have an employee/employer relationship with the Taxpayer and must have taxes withheld from their wages for each payroll period.
As provided in Code of Virginia § 58.1-475, penalty and interest shall be imposed where any employer fails to properly withhold Virginia payroll taxes. Pursuant to Code of Virginia § 58.1-467, the payment of Virginia income taxes by the recipient of wages shall in no case relieve the employer from liability for penalties for failure to withhold. The assessments were made using Form 1099 information provided by the Taxpayer. Where records were not accessible, averages were computed using the available data. Withholding tax was assessed only in cases where it could not be determined if individual income taxes had been filed. Otherwise, only penalty and interest were assessed for failure to withhold.
Based on the information provided above, there is no basis to treat the Group B drivers as independent contractors. Consequently, the withholding tax, penalty, and interest assessments for the periods January 1, 1989 through November 30, 1994 are correct. For your convenience, enclosed is a schedule of the updated bill amounts with interest accrued through the date of your appeal. The bills should be paid within 30 days to avoid the accrual of additional interest. Please remit your payment to ********Office of Tax Policy, Virginia Department of Taxation, P.O. Box 1880, Richmond, VA 23218-1880. Should you have any questions regarding this matter, you may contact her at *********************
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/
Rulings of the Tax Commissioner