Taxing Lessons From Court Decisions

Right the First Time

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Generally, workers prefer to be classified as employees rather than independent contractors. One reason: Employees do not have to file a Schedule C (Profit or Loss from Business (Sole Proprietorship)), or pay self-employment taxes.

The taxpayer in Schramm (T.C. Memo. 2011-212) chose the opposite course. As an adjunct professor of economics, he wanted to be treated as an independent contractor or a statutory employee rather than a common law employee. That way he could deduct teaching-related expenses on Schedule C instead of having those expenses limited on Schedule A (Itemized Deductions).

The university explained they’d already asked the IRS via Form SS-8 (Determination of Worker Status) whether adjunct professors should be treated as independent contractors or employees. Not surprisingly, the IRS determined adjunct professors were employees.

Even though the university agreed with the IRS determination and sent the taxpayer a Form W-2 (Wage and Tax Statement) at year end, he reported the income on Schedule C and claimed related expenses on that form.

The IRS, not surprisingly, sent a notice, assessing a $700 deficiency.

The court went through the exercise of an eight-factor test, and decided, not surprisingly, that the IRS was right–both times.

Taxing Lesson: Cost efficiency applies in tax law as well as economics.

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