In a recent case, Donald G. Cave, a Professional Law Corp., v. Comm’r, 109 A.F.T.R.2d 2012-1504 (5th Cir. 2012), the Fifth Circuit affirmed the Tax Court’s decision that associate attorneys were employees of an S corporation law firm. As a result the S corporation was liable for past due employment taxes, penalties and interest.
This is one in a long line of cases involving the determination of whether an individual is an employee or an independent contractor. In this case, the court focused on the common law factors illustrating whether a worker is a common law employee. The IRS and courts generally examine numerous factors, sometimes described as a twenty (20) factor test, in ultimately determining whether a worker is an employee or an independent contractor.
In this case, the Tax Court originally concluded, and the Fifth Circuit affirmed, that the associate attorneys were employees rather than independent contractors because of the high degree of control that the corporation exercised over the associate attorneys. Employee-independent contractor cases are factually intensive and can wreak financial havoc on companies in the form of past due employment taxes, penalties and interest on employers.