Taxing Lessons Case Summaries

Case — Employee or Independent Contractor?

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TL Case Summ


Can an individual be an employee and an independent contractor for the same employer?


Taxpayer Says: He was an employee with respect to his radio personality duties as described in his employment agreement and he was an independent contractor with respect to the promotional services he provided to his sponsors.

Internal Revenue Service Says: The taxpayer was a common law employee with respect to all of his earnings.


From Internal Revenue Code Section 3121(d)(2): Whether an individual is an employee or an independent contractor is a factual question to which common law principles apply.

From Federal Tax Regulation 31.3121(d)-1(c)(2): Sets forth criteria for identifying employees under common law rules.

From NLRB v. United Ins. Co., 390 U.S. 254, 258-260 (1968): Factors relevant in determining the existence of an employment relationship include: (1) the degree of control exercised by the principal over the details of the work; (2) which party invests in the facilities used by the worker; (3) the opportunity of the worker for profit or loss; (4) whether the principal can discharge the individual; (5) whether the work is an integral part of the principal’s regular business; (6) the permanency of the relationship; (7) the relationship the parties believe they were creating; and (8) the provision of employee benefits.

From Reece v. Commissioner, T.C. Memo. 1992-335: The fact that an individual is an employee in one capacity does not foreclose the possibility that the individual may independently contract with the employer in another capacity.


Besides the question of payroll taxes, one of the differences between employees and independent contractors is the deductibility of expenses. In general, when you’re an employee, you deduct business-related expenses on Schedule A of Form 1040 as an itemized deduction, subject to a 2% haircut—that is, the expenses are deductible to the extent they exceed 2% of your adjusted gross income.

When you’re self-employed, business expenses are deductible in full against your business income.

In this case, the taxpayer, an on-air radio personality, worked for a radio station in Texas. He signed an employment agreement to host a five-hour-a-day, six-day-a-week radio program, work as an announcer at the radio station, attend staff meetings, promote the station by meeting with persons in the entertainment, advertising, and related fields, and make off-air appearances promoting the station. For these services, the taxpayer received a base salary plus a bonus and stock options.

When the radio station began having financial difficulties, the taxpayer began finding additional radio sponsors on his own, and developed his own base of sponsors. He set the amount to be paid to him for his promotional services without input from the radio station. The amounts he received for these services varied from year to year depending on his personal efforts, and his promotional work for his sponsors was not governed by his employment agreement with the station. Only his sponsors had the right to terminate the promotional work with him. His employee benefits, which were paid by the station, were not affected by the number of sponsors he obtained.

The charges for the taxpayer’s promotional services were included as a line item in the station’s monthly invoice to the sponsors. The sponsors paid the station, and the station included that amount in the taxpayer’s paycheck. On each check, his salary was categorized as “Regular” and payment for his promotional services was categorized as “Talent & Remote”. The station withheld federal income tax as well as payroll taxes on the total amount, and gave the taxpayer Form W-2, Wage and Tax Statement that included both amounts.

The taxpayer’s accountant asked the station to remove $82,000 of promotional services income from the W-2, and issue Form 1099 for that amount. The station refused, so the accountant reported total wages as shown on Form W-2 on the taxpayer’s federal income tax return to avoid a matching problem with the IRS. He deducted the related expenses on Schedule C, and included a note indicating the income was shown on Form W-2 and reported on the corresponding line of the taxpayer’s return.

The IRS denied the Schedule C deductions, saying the taxpayer was a common law employee of the radio station, and the expenses were deductible only as a miscellaneous itemized deduction on Schedule A, subject to the 2% of adjusted gross income floor.


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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 and

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Right answer!
Sorry, wrong answer :(
For the taxpayer. All of the determining factors either favor classifying the taxpayer as an independent contractor or are neutral. Giving due consideration to the totality of the facts presented, we hold that the talent and remote fees paid to the taxpayer for appearance and promotional services were earned by him as an independent contractor. Consequently, the $82,000 talent and remote fee listed as wages on his income tax return should be reclassified as Schedule C gross receipts.