The IRS on Wednesday issued procedural guidance regarding Service decisions that a worker is properly classified as an employee of an employer rather than an independent contractor.

This distinction has important ramifications for labor law and taxation. These include that a person for whom services are provided must withhold from employees’ wages and remit employment taxes (typically, social security or railroad pension, health insurance, and on unemployment) and income taxes, but has no such obligation with respect to persons who are not considered employees, i.e. independent contractors. Employers must also pay a corresponding contribution on behalf of employees for social security and health insurance taxes.

Whether a worker is an employee is generally determined under the common law rules of whether the person for whom the services are provided has the right to control and direct the worker in the details and means by which the work is done. An employer who does not treat workers as employees may be liable for previous employment taxes and penalties, but may obtain relief in specified circumstances under Section 530 of the Revenue Act 1978, PL 95-600. To learn more, see “Tax Clinic: Worker Classification and the Evolving Service Delivery Model“, The tax advisor, July 2016; also “Independent contractor or not?” JofaMay 2004.

Wednesday’s advice Rev. proc. 2022-13, covers when and how the IRS will issue a notice of determination of his employment status under Sec. 7436 and how the person to whom it is issued can ask the Tax Court to review the decision. It amends and replaces Notice 2002-5, which provided that the issuance of a Sec. 7346 notice was a jurisdictional prerequisite for seeking Tax Court review under s. 7436. It further provided that the IRS would issue a Sec. 7436 notice only after the IRS determines that (1) one or more persons performing services for the taxpayer are employees, and (2) the taxpayer is not entitled to Section 530 relief.

The Tax Court subsequently expanded its jurisdiction to review the classifications of workers in SECC Corp.142 TC 225 (2014), and American Airlines, Inc., 144 TC 24 (2015). The Tax Court ruled that a Sec. 7436 notice is not a jurisdictional requirement, and even absent the issuance of a Sec. 7436 notice, a taxpayer may apply to the Tax Court for an IRS worker reclassification or a relief determination under Section 530 so long as the determination meets the requirements set forth in the notices of the Tax Court.

Specifically, pursuant to notice requirements, Rev. proc. 2022-13 provides that the Tax Court has jurisdiction under s. 7436 if: (1) the IRS conducts a review as part of an audit; (2) as part of the audit, the Service determines that (a) one or more persons providing services to the person are employees of the person for the purpose of worker reclassification, or (b) the person does not is not entitled to relief under section 530(a); (3) there is an “actual controversy” involving the determination under review; and (4) the person for whom the services in question were rendered files an appropriate argument in the Tax Court.

The tax procedure then addresses these four requirements, including the definition of “worker reclassification determination” and “actual controversy”. It details certain procedural requirements and limitations and clarifies the timelines for filing motions in Tax Court and their toll.

The income procedure is effective on February 7, 2022.

— To comment on this article or suggest an idea for another article, contact Paul Bonner at [email protected].