Originally published on Forbes.com July 24th, 2014
Although it is somewhat irrational, I really liked being subject to withholding. Back in the days when money actually earned interest, it was silly and unsophisticated. Still, it made me feel good and probably worked out for my financial well being in the long run. It is a lot easier to do something intelligent with a large refund check than a few extra dollars in periodic take-home pay. (I used my refunds and any other random money I received to make principal payments on my home mortgage.) So I can sympathize with David Iannuccillo who was recently before the Massachusetts Appeals Court. (Sorry no free link to decision, but here is a free link to the original decision being appealed.)
Mr. Iannuccillo had a beef with his $1,445 balance due to the Commonwealth. He had been working for a company called GreenWorks, which did landscaping (clever name). He reported the income on his Massachusetts tax return, but did not pay the resulting tax. His reasoning was that he was actually an employee of GreenWorks, so they should have withheld the tax. Under Massachusetts law, an employer who fails to withhold can be held liable by the Commonwealth for the tax that should have been withheld. Unfortunately for Mr. Iannuccillo, that provision does not get the taxpayer off the hook.
This argument is based on a misreading of the statute. We agree with the commissioner that while an employer will be held responsible for failing to withhold taxes, none of the provisions of G. L. c. 62B relieve the taxpayer from paying his own personal income taxes on the income he receives.
Our research has not disclosed any Massachusetts case directly on point; however, this precise issue has been considered and rejected by Federal courts including the United States Tax Court. Observing that Federal law on withholding is substantially similar to Massachusetts law on withholding, the board properly looked to Federal law for persuasive guidance. In Church v. Commissioner of Internal Rev., 810 F. 2d 19, 20 (2d Cir. 1987) , the United States Court of Appeals for the Second Circuit described an identical argument as ‘baseless.’ In that case, a taxpayer failed to report income she earned for six weeks of work as a secretary. After the Internal Revenue Service issued a deficiency notice, the taxpayer filed a petition for review arguing that her employer’s failure to withhold the tax from her wages relieved her of liability for the tax. In rejecting this argument, the court stated, ‘t is clear that the failure of an employer to meet its obligation to withhold income tax does not in any way lessen the obligation of an employee to pay income tax.’
A couple of observations are in order. The record doesn’t indicate exactly what Mr. Iannuccillo was doing for GreenWorks, but there is probably a decent chance that the company’s position for treating him as an independent contractor may have been on the weak side. Often the motive for companies involved in areas like landscaping and construction is to avoid workman’s comp which can be on the onerous side. Sometimes the “independent contractors” don’t mind so much, because they get a better deal on deducting expenses. That is certainly the case in Massachusetts.
The analysis of whether someone is an employee or independent contractor is rather complex and consists of the analysis of as many as twenty factors. For the sake of simplicity, I have boiled it down to a fairly simple rule of thumb. If you are asking the question, the person is probably an employee.
The main disadvantage to the “independent contractor” that is a clear benefit to the “not an employer” concerns FICA/Self-employment tax. An employer has to match FICA, but the self-employed have to pay both the employee and employer share. There is something that disgruntled former “independent contractors” can do about the matter if they are not afraid of burning bridges. They can file Form 8919 to claim the FICA match your “employer” should have paid. I have this sneaking suspicion that the IRS might not actually have the resources to chase most of the former employers, so it might not even turn out to be a bridge burner. Still, it is not something to be done lightly.
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