Tax Type
Employer Income Tax Withholding
Description
Failure to Withhold
Topic
Withholding of Tax
Date Issued
06-11-1999
June 11, 1999
Re: § 58.1-1821 Application: Withholding Tax
Dear***
This will respond to your letter in which you applied for correction of assessments of withholding taxes on behalf of your client, ***** (the "Taxpayer') for the months of March 1994 through February 1997. I apologize for the delay in responding.
FACTS
The Taxpayer was audited and assessed tax, penalty, and interest for failure to withhold taxes from certain individuals classified as independent contractors. As a result, taxes were not withheld from payments made to these individuals by the Taxpayer.
The Taxpayer is a janitorial company. Workers report daily to a central pick-up point and are driven to a home or business, perform a job and collect the Taxpayer's fee from the customer, and are then picked up and returned to another job or home.
The Taxpayer provides the workers with cleaning equipment and supplies. Workers are not directly supervised. If a customer is dissatisfied with the cleaning job, however, the Taxpayer requires the worker to return and correct the job without charge to the customer. Workers are not paid for correcting jobs and are responsible for any damages caused at the work place.
When new workers start, they will get training by sharing a job with the regular worker. As soon as a new worker is familiar with the requirements of the job, he or she begins working alone.
Workers are not punished or penalized for failing to work on a particular day. If a worker becomes chronically absent, however, the Taxpayer will replace that worker with new worker to fill the schedule and stops scheduling the absent worker for jobs. To the extent possible, the Taxpayer schedules workers for the same job every week.
The workers work under the business license of the Taxpayer. They are not required to account for their time, only for completing the required tasks of a given job. Before, the Taxpayer and the worker enter into any working relationship, the worker signs an agreement that he or she will be responsible for all taxes and worker's compensation. All workers are free to do jobs on their own or for other companies. Workers are permitted to have other jobs.
The Taxpayer can terminate the working relationship because of dishonesty or poor performance resulting in customer dissatisfaction. No minimum number of jobs is required.
You contend that these workers have been appropriately classified as independent contractors, or in the alternative, you contend that even if the workers are employees, they are protected by the safe harbor provision in § 530 of the Revenue Act of 1978. Thus, you request the assessment of withholding tax be abated.
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 (IRS) 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.
The Taxpayer has provided ample documentation and authority in arguing its position. The Taxpayer's factual situation applies to the twenty factor test as follows:
- 1. Instructions - An employee must comply with instructions about when, where, and how to work. Workers are assigned specific houses and businesses to clean at specific times. Although, they are not given specific instructions on how to perform their cleaning, they are indirectly instructed through training by existing employees.
2. Training - An employee may be trained to perform services in a particular manner. Workers are trained on the job by sharing jobs with regular workers and new workers are not allowed to work alone until that worker is familiar with the requirements of the job.
3. Integration - Employee's services are usually integrated into the business operations because the services are important to the success or continuation of the business. The services are integrated into the business operations because the cleaning of houses and businesses is the primary business activity of the Taxpayer. Without workers to clean houses, the Taxpayer would not be able to maintain its business.
4. Services rendered personally - An employee renders services personally. Workers do not render services personally because they are interchangeable. It is generally irrelevant to the Taxpayer or the customer which worker performs the cleaning. However, the Taxpayer does try to send a particular worker to the same job on a regular basis.
5. Hiring Assistants - An employee works for an employer who hires, supervises, and pays workers. An independent contractor can hire, supervise and pay assistants under a contract which requires him or her to provide materials and labor. There is no indication whether workers may subcontract out their jobs. However, because of the nature of the work, subcontracting out cleaning jobs is not likely.
6. Continuing Relationship - An employer has a continuing relationship with the employee. A continuing relationship may exist even if work is performed at recurring although irregular intervals. Clearly, many workers have a continuing relationship with the Taxpayer in that they perform work on a regular and continuing basis for the Taxpayer.
7. Set hours of work - An employee usually has set hours of work established by an employer. Workers do not have a set number of hours which they are required to work. However, the Taxpayer assign them jobs and schedules the day and time of the jobs.
8. Full-time required - An employee may be required to work or be available full-time. Workers are not required to work or be available on a full-time basis. The Taxpayer's records indicate that some workers work on nearly a full time basis while others work relatively few hours.
9. Work done on premises - An employee usually works on the premises of an employer, or works on a route or at a location designated by an employer. Workers are designated to particular houses and businesses by the Taxpayer.
10. Order or Sequence Set - An employee may be required to perform services in the order or sequence set by an employer. Workers are not required to clean in any particular sequence. They may clean a house or business in any order they choose.
11. Reports - An employee may be required to submit reports to an employer. Workers are not required to account for and submit reports to the Taxpayer. The only reports the Taxpayer gets is from customers. Workers are, however, responsible for collecting the Taxpayer's fees and reporting them to the Taxpayer.
12. Payments - An employee is usually paid by the hour, week or month. In this case, workers are paid by the job.
13. Expenses - An employee's business and travel expenses are usually paid for by the employer. Workers are transported to and from job sites at the Taxpayer's expense.
14. Tools and materials - An employee is normally furnished significant tools, materials, and other equipment by the employer. The Taxpayer provides the workers with a large vacuum cleaner, a smaller vacuum, mops, rags and any other equipment that the worker needs to perform the cleaning job.
15. Investment - An independent contractor has a significant investment in the facilities he or she uses in performing services for someone else. Workers do not make any investment in the facilities that used in performing services for the Taxpayer. All equipment is provided by the Taxpayer.
16. Profit or loss - An independent contractor can make a profit or suffer a loss. Workers cannot make a loss in performing this service. Workers do not incur any expenses. They are paid by the job for the services rendered. If they perform the job, they earn money.
17. Worked for more than one person or firm - An independent contractor is generally free to provide his or her services to two or more unrelated persons or firms at the same time. Workers are permitted by contract to work for other employers at the same time. Indeed, nothing prevents them from working for other cleaning services.
18. Offers services to the general public - An independent contractor makes his or her services available to the general public. Workers are free to offer their services to the general public.
19. Right to fire - An employee can be fired by an employer. An independent contractor cannot be fired so long as his job is satisfactory. In this case, workers can only be fired for dishonesty, poor performance resulting in customer satisfaction, or chronic absenteeism.
20. Right to Quit - An employee may quit his job at any time without incurring liability. An independent contractor usually agrees to complete a specific job and is responsible for its satisfactory completion. Workers may not quit in the middle of an assignment. However, they may stop taking new assignments.
The twenty factors act as a guideline to determine whether sufficient control is present to establish an employer-employee relationship. The degree of importance of each factor varies depending on the type of work and individual circumstances.
Many factors favor the workers as independent contractors. In particular, workers are paid by the job and are permitted to extend their services to the public or to other employers. However, the factors which address the Taxpayer's control over the worker are the most important factors in this case. These "control' factors include instructing where and when to work, giving training on how to perform the work and providing equipment to the workers. A majority of the factors, and in particular, the "control' factors portray the Taxpayer as an employer rather than a contractor of workers.
You also contend that even if its workers are employees, the Taxpayer is protected from the assessment of additional tax, penalty and interest by a safe harbor in the enactment language of the Revenue Act of 1978. The safe harbor provides a haven for businesses which have historically treated their employees as independent contractors.
The safe harbor provides that employers will not be held liable for federal employment taxes if they have always treated their employees as independent contractors and there was a reasonable basis for treating them as independent contractors. Employers have a reasonable basis for treating their employees as independent contractors if one of the following three tests are met: 1) the Taxpayer relied on court precedent, published rulings, and technical advice with respect to the Taxpayer or an IRS letter ruling; 2) a past IRS audit in which no assessment attributable to the status of workers was made; or 3) a long standing recognized practice of treating workers as independent contractors by a significant segment of the industry.
The Taxpayer contends that it meets the third reasonable basis test for determining that it falls within the 530 safe harbor. You cite a 1984 report by the American Entrepreneurs Association which states that most small operators in the janitor service industry tend to obtain labor on subcontract basis.
Virginia law does not provide a safe harbor similar to that found in the Revenue Act of 1978. Employers are required to withhold income tax from compensation paid to employees. Because Virginia law is not specific as to what constitutes an employer/employee relationship, the department has used the guidance provided in Treasury Regulation §31.312(d)-1 and IRS Publication 937. The department has found these IRS documents to be a good source of guidance for purposes of determining the nature of an employment relationship under the common law definition.
Further, the janitorial industry has not been recognized by the IRS as qualifying under the § 530 safe harbor. In PLR 9829030 (7/17/98), copy enclosed, the IRS ruled that a janitorial worker was an employee, not an independent contractor. As such, even if the department recognized the safe harbor, janitorial services is not among the industries eligible for safe harbor protection.
Accordingly, the assessments of additional tax, penalty and interest for the failure to withhold are upheld. Please remit the assessed tax and updated interest as shown on the enclosed schedule to ***** at the Office of Tax Policy, Virginia Department of Taxation, P.O. Box 1880, Richmond, Virginia 23218-1880. If you have any questions about this determination, you may contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12970B
Rulings of the Tax Commissioner