Tax Court Says Private-Duty Nurses are Employees

The IRS and employers are often at loggerheads over whether workers should be treated as employees or independent contractors, private-duty nurses included. 

When push comes to shove, an employer may have an ace in the hole: Section 530 relief. However, as shown in a new case, Pediatric Impressions Home Health, TC Memo 2022-35, 4/12/22, you can play this card only if you hold a winning hand.

Background: The classification of workers can be a big deal from a tax viewpoint. If a worker is classified as an employee, the employer must withhold federal income tax and the employee’s half of Social Security and Medicare taxes (FICA). Even worse, the employer must pay half of the FICA tax and the federal unemployment tax (FUTA). And it must issue Form W-2 for the wages and send a copy to the IRS.

In contrast, if a worker qualifies as an independent contractor, the employer doesn’t have to worry about federal income tax withholding, FICA or FUTA. Also, it doesn’t have to provide expensive fringe benefits, like health insurance, that are offered to employees.

Although there are no absolute rules for determining the status of workers, the IRS has established certain guidelines. Generally, workers don’t qualify as independent contractors if they perform services that are controlled by the employer. Independent contractors must operate independently.  In the event the IRS contests a classification, however, an employer may be able to fall back on a special safe-harbor rule. 

Section 530 relief: Under this provision, which refers to a section in a 1978 law, an employer is exempt from employment tax liability if it meets the following requirements:

• The employer hasn’t treated the worker as an employee for any period and doesn’t treat workers in similar positions as employees.
• All federal returns that are required to be filed by the employer (including information returns) consistently treat the worker as an independent contractor.
• The employer has a “reasonable basis” for not treating the worker as an employee. For example, the claim may be based on past cases or rulings, an IRS audit or the longstanding practice of a significant segment of the same industry.

Facts of the new case:  A firm headquartered in Houston, Texas provided a group of nurses for private services in the homes of clients. The firm exercised significant control over the nurses. For instance, it supervised the nurses, set their work schedules, trained them, provided all of their supplies and paid insurance for them. The firm could fire these workers at will. Furthermore, the clients paid the firm directly to the firm for the nursing services—not to the nurses themselves.

When the firm treated some of the workers as independent contractors, rather than employees, the IRS disagreed. Ultimately, the Tax Court sided with the IRS based on the level of control exerted by the firm over the workers.

Alternatively, the firm tried to rely on Section 530 relief, but it didn’t measure up to the standards. The firm didn’t treat all workers in similar situations as independent contractors, nor did it file 1099s for the disputed workers. Finally, the Tax Court determined that it didn’t have a reasonable basis for treating the nurses as contractors instead of employees. Result: Section 530 relief was denied.