Long, But a Must Read for Contractors

Internal Revenue Service SB/SE, Compliance
BIRSC, SS-8 Unit
Date: November 16, 2005
74604
Dear Mr.


Department of the Treasury 1040 Waverly Avenue-Stop 631 Holtsville, NY 11742
Form: SS-8
Person to Contact:
Lisa Bauer#19-02043
Telephone Number: 631-654-6025x5306 Facsimile Number: 631-654-6338
Refer Reply to: Case # 02043



This is in reply to your request for a determination of your Federal employment tax status with respect to the services that you performed in 2004 and 2005 for K & M Installations, Inc .. We hold you to have been an employee for Federal tax purposes. As authorized by Section 5.10 of Revenue Procedure 2005-1, Internal Revenue Bulletin 2005-1 , we have enclosed a copy of the determination letter issued to the firm concerning your status.
Accordingly, you are liable for your Federal income tax and your share of Federal Insurance Contributions Act (FICA) tax according to Internal Revenue Code Sections 3101 and 3509(d)(1 )(A). Please refer to the enclosed Notice 989, "Commonly Asked Questions When IRS Determines Your Worker Status is Employee," for applicable filing/amendment requirements and instructions regarding your Federal income tax and FICA tax obligations.

Our records indicate that you have not yet filed your 2004 tax return. You must now file your tax return to reflect your employee status. Include the income you have received from the firm as wages. Attach copies of this letter, the determination letter, and Form 4137 to your completed Form 1040, Tax Return, and forward them to the IRS Campus where you normally file your returns. You do NOT need to wait for corrected pay documents from the firm in order to amend your return.
If you have any questions about these instructions, please call 1-800-829-4933 or visit your local IRS office.
Sincerely,
Lisa Bauer
Employment Tax Technician
Enclosures: Determination Letter Notice 989
Forms: 1040 & Instructions 2004:4137
*To order forms and publications, please call1-800-TAX-FORM or visit us online at www.irs.qov.
Letter 3750-A (CG) (Rev. 9-2003) Catalog Number 36648W

*******Letter to owner of K&M Installations********

Internal Revenue Service SB/SE, Compliance
BIRSC, SS-8 Unit
Date: November 16, 2005
Darrel Knight
K & M Installations, Inc. 26 SW E Avenue
Lawton, OK 73501-4627 267
Dear Mr. Knight:


Department of the Treasury 1040 Waverly Avenue-Stop 631 Holtsville, NY 11742
Form: SS-8
Person to Contact:
Lisa Bauer19-02043
Telephone Number: 631-654-6025x5306 Facsimile Number: 631-654-6338
Refer Reply to: Case



This is in response to a Form SS-8 that was submitted to request a determination of employment status for Federal employment tax purposes, between K & M Installations, Inc., hereafter referred to as the firm, and , hereafter referred to as the worker, for services performed in 2004 and 2005.

We hold the worker to have been an employee of the firm. In the rest of this letter, we will explain the facts, law, and rationale that form the basis for this finding.
The firm is in the business of providing Satellite Installation for other companies. The firm engaged the services of the worker as a Satellite Installer from May 2004 until January 2005.

The worker received training from the firm and was instructed in the way the work was to be completed. The worker was to report to the firm each morning at 7:00AM., and was given his assignments for the day on a "work order". The worker received AM. jobs, which must be completed by 12:00P.M., and the P.M. jobs had to be completed

by the end of the day. All services the worker performed had to meet the standards of the firm's clients. The worker must be at the first customer's location at 8:00AM., if the worker was late, there was a financial penalty.

There were meetings held by the firm, to inform the worker of any changes that the firm's clients have requested. The worker submitted time sheets and work orders.

These forms were to be given to the firm each morning, showing the time the worker arrived at each job, what services he performed, and the time he left each job. The firm retained the right, if necessary to protect their business interest, to determine or change the methods used by the worker to the extent that he would have to correct any jobs that were not to the firm's customer's

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satisfaction. The firm was ultimately responsible for the resolution of any problems or complaints that arose from the services provided by the worker.

The nature of the relationship with the firm contemplated that all of the worker's services were to be performed by him personally. If substitutes were needed, the firm was responsible for hiring and paying them.

The firm provided the satellite equipment, dishes, the hardware for assembly and the receivers for each job. The worker used his personal vehicle to drive to the job sites, supplied materials and tools needed to complete the job.

If the worker needed money to pay for the materials, or gas for his vehicle, the firm would give him an advance, and then deduct this money from his next paycheck.

The worker also submitted a "Charge Back" form, which explains the various charges the firm deducts from the worker.
There are several "financial penalties" listed on this form. If the worker does not turn in a "checkout sheet" he is charged a fee, if his cell phone is not active, if job discrepancies are not corrected in 24 hours, and various other reasons for the firm to charge the worker with penalties.
The firm's clients paid directly to the firm and the worker was provided remuneration in the form of piece work. The worker did not assume any financial risk in the relationship and therefore could not realize a profit or incur a loss as a result of the relationship.

There was no written contract describing the terms and conditions of the relationship. The firm stated they do not provide worker's compensation insurance on the worker; however, the worker submitted paper work he received from the firm, indicating they have -deducted money from his check for worker's compensation insurance.
The worker did not keep a business telephone listing or provide similar services for other firms. The relationship was continuous as opposed to a single transaction. Both parties retained the right to terminate the relationship without incurring liability, and in fact, the relationship has ended.

Section 3121 (d)(2) of the Internal Revenue Code provides that the term "employee" means any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of employee.

The question of whether an individual is an independent contractor or an employee is one of fact to be determined upon consideration of the facts and the application of the law and regulations in a particular case.
Guides for determining the existence of that status are found in three substantially similar Sections of the Treasury Regulations. They are Sections 31.3121 (d)-1, 31.3306(i)-1, and 31.3401 (c)-1 relating to the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUT A), and Federal income tax withholding on wages at source, respectively.

Section 31.3121 (d)-1 (c)(2) of the regulations provides that generally, the relationship of employer and employee exists when the person for whom the services are performed has the right to control and direct the individual who performs the services not only as to the results to be accomplished by the work, but also as to the details and means by which the result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what shall be done, but also as to how it shall be done.


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In this connection, it is not necessary that the employer actually direct or control the manner in which services are performed; it is sufficient if he or she has the right to do so. In general, if an individual is subject to the control or direction of another merely as to the result to be accomplished and not as to the means and methods for accomplishing the result, he or she is an independent contractor.

In determining whether an individual is an employee or an independent contractor under the common law, all evidence of both control and lack of control or autonomy must be considered. In doing so, one must examine the relationship of the worker and the business.
Facts that illustrate whether there is a right to direct or control how the worker performs the specific tasks for which he or she is hired, whether there is a right to direct or control how the financial aspects of the worker's activities are conducted, and how the parties perceive their relationship provide evidence of the degree of control and autonomy.


Section 31.3121(d)-1(a)(3) of the regulations provides that if the relationship of an employer and employee exists, the designation or description of the parties as anything other than that of employer and employee is immaterial.
Thus, if an employer¬-employee relationship exists, any contractual designation of the employee as a partner, co-adventurer, agent, or independent contractor must be disregarded.
We have applied the law, regulations, and principles as cited above to the information submitted. As is the case in almost all worker classification cases, some facts point to an employment relationship while other facts indicate independent contractor status.

The determination of the worker's status, therefore, rests on the weight given to the factors under the common law, keeping in mind that no one factor is determinative of a worker's status. The degree of importance of each factor varies depending on the occupation and the factual context in which the services are performed. In weighing the evidence, careful consideration has been given to the factors outlined below.

Under the common law, the relationship of employer and employee exists when the person for whom the services are performed has the right to control not only what is done, but also how it is done. Evidence of control generally falls into three categories: behavioral controls, financial controls, and relationship of the parties, which are collectively referred to as the categories of evidence ..

Factors that illustrate whether there is a right to control how a worker performs a task include training and instructions. In this case, you retained the right to change the worker's methods and to direct the worker to the extent necessary to protect your financial investment.
Factors that illustrate whether there is a right to direct and control the financial aspects of the worker's activities include significant investment, un-reimbursed expenses, the methods of payment, and the opportunity for profit or loss. In this case, the worker did not invest capital or assume business risks, and therefore, did not have the opportunity to realize a profit or incur a loss as a result of his services.


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Factors that illustrate how the parties perceive their relationship include the intent of the parties as expressed in written contracts; the provision of, or lack of employee benefits; the right of the parties to terminate the relationship; the permanency of the relationship; and whether the services performed are part of the service recipient's regular business activities.

In this case, the worker was not engaged in an independent enterprise, but rather the services performed by the worker were a necessary and integral part of your business. Both parties retained the right to terminate the work relationship at any time without incurring a liability.
A worker who is required to comply with another person's instructions about when, where, and how he or she is to work is ordinarily an employee. This control factor is present if the person or persons for whom the services are performed have the right to require compliance with instructions.

Some employees may work without receiving instructions because they are highly proficient and conscientious workers or because the duties are so simple or familiar to them. Furthermore, the instructions that show how to reach the desired results may have been oral and given only once at the beginning of the relationship. See, for example, Rev. Rul. 68-598, 1968-2 C.B. 464, and Rev. Rul. 66-381, 1966-2 C.B. 449.

Training a worker by requiring an experienced employee to work with the worker, by corresponding with the worker, by requiring the worker to attend meetings, or by using other methods, indicates that the person or persons for whom the services are performed want the services performed in a particular method or manner.
This is true even if the training was only given once at the beginning of the work relationship. See Rev. Rul. 70-630, 1970-2 C.B. 229.

Integration of the worker's services into the business operations generally shows that the worker is subject to direction and control. When the success or continuation of a business depends to an appreciable degree upon the performance of certain services, the workers who perform those services must necessarily be subject to a certain amount of control by the owner of the business. See United States v. Silk, 331 U.S. 704 (1947), 1947-2 C.B. 167.

If the services must be rendered personally, presumably the person or persons for whom the services are performed are interested in the methods used to accomplish the work as well as in the results. See Rev. Rul. 55-695, 1955-2 C.B. 410.

A continuing relationship between the worker and the person or persons for whom the services are performed indicates that an employer-employee relationship exists. A continuing relationship may exist where work is performed in frequently recurring although irregular intervals. See United States v. Silk, 331 U.S. 704 (1947), 1947-2 C.B. 167.

The establishment of set hours of work by the person or persons for whom the services are performed is a factor indicating control. If the nature of the occupation makes fixed hours impractical, a requirement that workers be on the job at certain times is an element of control. See Rev. Rul. 73-591,1973-2 C.B. 337.
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The term "full-time" may vary with the intent of the parties and the nature of the occupation since it does not necessarily mean working an eight hour day or a five or six day week. If the worker must devote substantially full-time to the business of the person or persons for whom the services are performed, such person or persons have control over the amount of time the worker spends working and, therefore, the worker is restricted from doing other gainful work.

An independent contractor, on the other hand, is free to work when and for whom he or she chooses. See Rev. Rul. 56-694, 1956-2 C.B. 694.
A requirement that the worker submit regular or written reports to the person or persons for whom the services are performed indicates a degree of control. See Rev. Rul. 70¬309, 1970-1 C.B. 199, and Rev. Rul. 68-248, 1968-1 C.B. 431.
Payment by the hour, week, or month generally points to an employer-employee relationship, provided that this method of payment is not just a convenient way of paying a lump sum agreed upon as the cost of a job. In such instances, the firm assumes the hazard that the services of the worker will be proportionate to the regular payments.

This action warrants the assumption that, to protect its investment, the firm has the right to direct and control the performance of the workers. Also, workers are assumed to be employees if they are guaranteed a minimum salary or are given a drawing account of a specified amount that need not be repaid when it exceeds earnings. See Rev. Rul. 74-389, 1974-2 C.B. 330.
The fact that the person or persons for whom the services are performed furnish significant tools, materials, and other equipment tends to show the existence of an employer-employee relationship. See Rev. Rul. 71-524,1971-2 C.B. 346.

Lack of investment by a person in facilities or equipment used in performing services for another indicates dependence on the employer and, accordingly, the existence of an employer-employee relationship. The term "significant investment" does not include tools, instruments, and clothing commonly provided by employees in their trade; nor does it include education, experience, or training. Also, if the firm has the right to control the equipment, it is unlikely the worker had an investment in facilities. See Rev. Rul. 71-524, 1971-2 C.B. 346. Special scrutiny is required with respect to certain types of facilities, such as home offices.

A person who can realize a profit or suffer a loss as a result of his or her services is generally an independent contractor, while the person who cannot is an employee. See Rev. Rul. 70-309, 1970-1 C.B. 199. "Profit or loss" implies the use of capital by a person in an independent business of his or her own. The risk that a worker will not receive payment for his or her services, however, is common to both independent contractors and employees and, thus, does not constitute a sufficient economic risk to support treatment as an independent contractor.

If a worker loses payment from the firm's customer for poor work, the firm shares the risk of such loss. Control of the firm over the worker would be necessary in order to reduce the risk of financial loss to the

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This determination is based on the application of law to the information presented to us and/or discovered by us during the course of our investigation; however, we are not in a position to personally judge the validity of the information submitted. This ruling is directed only to the taxpayer to whom it is addressed, however, it may be applicable to any other individuals engaged by the firm under similar circumstances. Section 6110(k)(3) of the Code provides it may not be used or cited as precedent.

You are encouraged to comply with this determination by filing/amending your employment tax returns accordingly. For information regarding your tax liabilities, your eligibility for Section 3509 rates, and instructions concerning the filing/amendment of your employment tax returns, please see the enclosed Information Guide, "Frequently Asked Questions When IRS Reclassifies Workers as Employees."

However, if you deem that your firm would meet the criteria for Section 530 relief as outlined in the enclosure, and do not want to jeopardize this potential relief for any tax periods, you should not amend your returns at this time.
You may abide by this determination and reclassify your worker to employee status now without jeopardizing any relief for prior tax periods, if qualified. Note: Once you begin treating a worker in this class as an employee, Section 530 relief will not be available to you for any future periods for this class of worker.

If you need further assistance in filing/amending your employment tax returns due to the reclassification of your worker, please call the I RS help line at 1-800-829-4933 or visit your local I RS office. Call 1-866-455-7438 for assistance in preparing or correcting Forms W-2, W-3, 1099, 1096, or other information returns.
I nternal Revenue Code Section 7436 concerns reclassifications of worker status that occur during IRS examinations. As this determination is not related to an IRS audit, it does not constitute a notice of determination under the provisions of Section 7436.
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Peggy D'Amico Operations Manager
Enclosures: Section 530 Fact Sheet
Notice of IRS Compliance Expectations Forms/Pubs: 941 and 941 c, Information Guide, 2004: 940, 1099-MISC, 1096, W-2, W-3,
*To order forms and publications, please call 1-800-TAX-FORM or visit us online at www.irs.qov.
cc:
Letter 3711-A (CG) (Rev. 9-2003) Catalog Number 366300