Tax Type
Employer Income Tax Withholding
Description
Withholding definitions; Employee
Topic
Withholding of Tax
Date Issued
04-14-1997
April 14, 1997
Re: § 58.1-1821 Application: Withholding Tax
Dear********************
This will respond to your letter of January 14, 1997, in which you applied for correction of assessments of withholding taxes for***** (the "Taxpayer").
FACTS
The Taxpayer is a building janitorial contractor who was subject to a field audit. For the periods January 1, 1993 through December 31, 1996, the Taxpayer was assessed tax, penalty, and interest for failure to withhold taxes from certain individuals whom the Taxpayer classified as independent contractors. As a result, taxes were not withheld by the Taxpayer.
In some cases, the Taxpayer sub-contracts with both individuals and other building janitorial service companies to perform services. In other cases, the Taxpayer holds a contract to perform services. The sub-contracts with the other companies are not at issue in this case, the classification of the individuals as independent contractors is at question.
DETERMINATION
Code of Virginia § 58.1-460 defines "employee" as, "[A]n individual, whether a resident or a nonresident of the Commonwealth, who performs or performed any service in the Commonwealth for wages ...." The Code of Virginia does not define "independent contractor" for withholding tax purposes. Nevertheless, federal law provides certain factors to distinguish between an employee and an independent contractor.
Treasury Regulation § 31.3121(d)-1 provides these factors, and is summarized in Internal Revenue Service Publication 937. The 20 factors enumerated in this publication are used as a guideline for determining whether a worker is an employee or an independent contractor. These items, however, are not the only elements considered when determining the classification of workers.
In the instant case, the assessments were made due to the lack of withholding on individual taxpayers. Janitorial company sub-contractors were not involved. The Taxpayer has furnished no clear and cogent evidence on how, when, and where the work is to be performed that would indicate that these individuals acted in the capacity of independent contractors. Consequently, the Taxpayer was held liable for withholding taxes on these individuals.
The term "employer" is defined by Code of Virginia § 58.1-460 as "[T]he person ... for whom an individual performs or performed any service as an employee ...." Code of Virginia § 58.1-461 provides that employers must withhold taxes on wages of employees. Accordingly, the individuals performing the services for or on behalf of the Taxpayer have an employee/employer relationship and must have taxes withheld from their wages for each payroll period. In this case, the withholding taxes were assessed when it could not be determined if the individuals in question included their payments when they filed their individual income taxes.
Based on the evidence available, there is no basis to treat the individuals in question as independent contractors. Therefore, the withholding tax, penalty, and interest assessments are correct. The updated assessments as shown on the attached schedule should be paid within the next 30 days to avoid accrual of additional interest. Please remit your payment to************* Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12143R
Rulings of the Tax Commissioner