Case — Classification as Statutory Employee

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TL Case Summ

THE QUESTION

Is an educational consultant working for a school district considered a statutory employee who is not required to pay self-employment tax?

THE DISPUTE

Taxpayer Says: Services rendered to the school district meet the requirements necessary to qualify under the statutory definition of “home worker”, and self-employment tax is not owed.

Internal Revenue Service Says: Self-employment tax is owed. Taxpayer is not a home worker because all the requirements were not met – specifically, goods or materials were not received from the school district.

THE LAW

From Internal Revenue Code Section 3121(d)(3)(C): A statutory employee includes any individual, other than an officer of a corporation or a common law employee, who performs services for pay for any person “as a home worker performing work, according to specifications furnished by the person for whom the services are performed, on materials or goods furnished by such person which are required to be returned to such person or a person designated by him”.

From Employment Tax Regulations Section 31.3121(d)-1(d)(3)(iii): An individual is considered to be a “home worker” for purposes of section 3121(d)(3)(C) if he or she performs services off the premises of the person for whom the services are performed.

From Internal Revenue Code Section 3121(d)(3): An individual will not be a statutory employee, however, if the services are performed as a single transaction rather than part of a continuing relationship, or if the individual has a substantial investment in the facilities used in connection with the performance of the services.

THE CAUSE OF THE DISPUTE

By statute you may be deemed an employee for purposes of paying certain taxes, even if you think of yourself as an independent contractor. If you fit into this category, you’re a ‘statutory employee’, and you’ll receive Form W-2 from the company you work for. You report that income, and related allowable expenses, on Schedule C or C-EZ, Profit or Loss From Business (Sole Proprietorship) of your personal income tax return, as if you’re self-employed. However, you’re not liable for self-employment tax because your employer must withhold FICA taxes from the amounts paid to you.

Internal Revenue Code Section 3121 spells out the general requirements for meeting the definition of statutory employee. In this case, the requirement in dispute is that the work be performed “on materials or goods furnished by the person for whom the services are performed which are required to be returned to such person or a person designated by him”. Neither the code nor regulations provide guidance on the meaning of “materials” or “goods”.

Taxpayer believes templates supplied by the school district, which were completed at taxpayer’s home and returned to the school district, are materials or goods. The IRS contends these templates are not materials or goods.

WHAT WOULD YOU DECIDE?

Make your selection, then see “The Court’s Decision” below for a full explanation

For the or for the

THE COURT’S DECISION

Download (PDF, 11KB)

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HL Carpenter, an experienced investor and a CPA, specializes in reader friendly articles on taxes and investing for individuals and small businesses, and publishes two newsletters: Taxing Lessons and Top Drawer Ink. Visit TaxingLessons.com and HLCarpenter.com.

This information should not be considered legal, investment or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment or tax advice. Always consult your legal, investment and/or tax advisor regarding your personal situation.

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Right answer!
Sorry, wrong answer :(
For the Taxpayer. Materials are typically the tools or apparatus for the performance of a given task. The templates are materials. Taxpayer is a statutory employee and does not have to pay self-employment tax.
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