28 JANUARY 2024 WorldWide Drilling Resource® Drilling Into Money Not Boring by Mark E. Battersby Defining the New Independent Contractor The seemingly never-ending debate over how workers should be classified - or label themselves - under federal labor and tax laws is heating up again. Independent contractors are usually exempt from labor and unemployment rules and regulations such as minimum wage, overtime pay, and retirement contributions, as well as some payroll issues. Employees, of course, are covered by these regulations. Every drilling operation or business obviously appreciates the absence of payroll taxes and the withholding burden associated with employees and nonexistent with independent contractors. The failure of a drilling-related business to properly classify independent contractors and document their status at the beginning of a relationship can lead to a liability for workers’ compensation and unemployment taxes, benefits lawsuits, and wage and hour claims down the road. An excellent example of the independent contractor vs. employee label was provided by a recent ruling by the U.S. Tax Court. In that case (T.C. Memo 2023-64), the workers worked long hours and were paid a higher hourly rate for time in excess of eight hours in a day. Workers were subject to supervision and had set procedures with no formal contracts. The taxpayer in this case did not File Form 1099-MISCs or provide W-2s to the workers. The Tax Court looked at several factors including the degree of control exercised, which party invested in the facilities where the work was performed, the worker’s opportunity for profit or loss, and four other factors to conclude the workers were employees. Compounding the decision, the court ruled the taxpayer did not qualify for Section 530 relief. Section 530 is a relief provision which terminates a taxpayer’s employment tax liability when an individual is not treated as an employee - if three requirements are met: (1) reporting consistency, (2) substantive consistency, and (3) reasonable basis. Section 530 provides a permanent cure for a business’s employment tax liabilities relating to a particular group or groups of workers. It applies to periods under audit and all future periods so long as the requirements are met. Unfortunately, Section 530 does not extend to the worker, who may still be liable for the employee share of FICA (Social Security and Medicare Taxes), not self-employment tax. The independent contractor debate has been around for decades and despite the Department of Labor’s new definition, will not end the debate but will further confuse the issue. Thus the need, once again, for reviewing and documenting all worker relationships, perhaps with the aid of a professional, to avoid potential retroactive payroll expenses. Mark Mark E. Battersby may be contacted via e-mail to michele@worldwidedrillingresource.com
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