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Transportation Brief: Spotlight on Taxation Practice - Federal Employment Tax IC Classification Portfolio

Kelli M. Block, Steven A. Pletcher, Rebecca S. Trenner

August 8, 2019

Spotlight on Taxation Practice - Federal Employment Tax IC Classification Portfolio

Highly publicized cases and legislative initiatives have triggered increased scrutiny of non-asset-based transportation companies that engage owner-operators to furnish equipment and professional driving services as independent contractors (ICs). While headlines tend to focus on private, class-action litigation championed by the plaintiffs’ bar, federal employment tax audits remain an equally active battlefront for transportation companies that engage ICs. The ripple effects of such audits may be significant, particularly given the IRS’s information-sharing initiative with the U.S. DOL and state unemployment tax agencies.

Several special IRS programs are designed to focus on worker classification as a stand-alone issue. However, an IRS worker classification audit may stem from other IRS proceedings, including:  

  • A general corporate income tax audit if the IRS learns the taxpayer under examination has issued multiple Form 1099s
  • Routine examinations of quarterly Form 940 and 941 tax returns
  • IC-initiated SS-8 determination requests (i.e., a process often initiated by an allegedly misclassified IC undergoing a personal income tax audit).

Because of this, it is best to use caution when responding to any IRS inquiry regarding worker classification, even if the initial inquiry relates to just one allegedly misclassified IC. A timely and thorough initial response may substantially reduce the likelihood of misclassification liability exposure. Often, these responses rely on the safe harbor available under Section 530 of the Internal Revenue Code, which is a legislative relief mechanism born out of the overly aggressive IRS independent contractor reclassification efforts in the 1970s. In the event of a misclassification determination, a putative employer may still limit its federal employment tax liability through strategic participation in various programs providing for reduced tax rates.

The Firm’s employment tax group regularly assists clients — both directly and behind the scenes — when responding to IRS inquiries. These matters include not only worker classification matters, but a multitude of other employment tax issues including, accountable (or “per diem”) plan expense reimbursement issues and matters involving interstate drivers properly classified as employees, such as state and local withholding tax issues. 

Scopelitis Partner Steve Pletcher directs the Firm’s employment tax group along with assistance from Partners Kelli Block and Becky Trenner.


 

Scopelitis’ Transportation Brief® is intended as a report to our clients and friends on developments affecting the transportation industry. The published material does not constitute an exhaustive legal study and should not be regarded or relied upon as individual legal advice or opinion.


 

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