Tax Type
Employer Income Tax Withholding
Description
Failure to Withhold
Topic
Withholding of Tax
Date Issued
06-21-1999
June 21, 1999
RE: 1821 Appeal: Withholding Taxation
Dear *****:
This will reply to your letter of in which you, on behalf of your client, applied for the correction of an assessment of withholding tax against ***** (the "Taxpayer') for the periods of January 1995 through December 1996. I apologize for the delay in responding.
FACTS
The Taxpayer is a janitorial contractor which was subject to an audit for the periods of January 1, 1995 through December 31, 1996. The Taxpayer was assessed for failure to withhold taxes from certain individuals whom the Taxpayer classified as independent contractors.
The Taxpayer's records show that the individuals in question were operating janitorial businesses. Under audit, neither the Taxpayer nor the department was able to substantiate the existence of most of the businesses. The few that were located indicated that they were required to wear the Taxpayer's uniform while on the job. These businesses also confirmed that they supplied their own cleaning equipment while the Taxpayer provided the cleaning supplies. All stated that they were permitted to use employees or subcontractors to complete the jobs. Although permitted to hold themselves out to public as a business, none worked for anyone other than the Taxpayer.
Subsequent to the audit, the Taxpayer has provided copies of subcontractor agreements for most of these janitorial businesses. All but two of the businesses submitted completed W-9 forms and certificates of insurance to the Taxpayer. There is also evidence that several organizations procured business licenses and incorporated in Virginia. Some of the organizations are listed in the phone book and have business cards. A few of the organizations were paying for unemployment benefits and worker's compensation.
The Taxpayer contends that it maintained an independent contractor relationship with the businesses and requests that the assessments be abated.
DETERMINATION
Code of Virginia Sec. 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 Sec.31.3121(d)-1 provides these factors, and is summarized in Internal Revenue Service Publication 937, copy enclosed. 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 the businesses.
In applying the 20 factor test, certain factors are to be given more weight than other factors. Factors which directly address whether an individual has control over another individual's work processes. For example, providing instructions to a worker about when, where and how to work is strong evidence of a employer/employee relationship while having a worker provide reports is less indicative of an employment relationship..
Several factors support an employer/employee relationship. The Taxpayer provided instruction in performing janitorial services to the businesses. Most of the businesses maintain an ongoing working relationship with the Taxpayer and the Taxpayer provides cleaning supplies and uniforms for the organizations.
There are also a number of factors that support an independent contractor relationship. The businesses were allowed to schedule their own hours and hired employees. The businesses provided cleaning equipment and incurred their own business related expenses.
The weight of the evidence between the Taxpayer and the businesses does not support an assertion of an employer/employee relationship. However, the Taxpayer did not supply satisfactory evidence to demonstrate that two of the businesses were independent contractors. In addition, the Taxpayer concedes that one individual listed in the audit was an employee. Accordingly, the withholding tax assessments have been adjusted to remove those individuals working for janitorial businesses classified as subcontractors.
The enclosed schedule shows the revised withholding tax, penalty and interest due. Please send your payment to ***** Office of Tax Policy, Virginia Department of Taxation, P.O. Box 1880, Richmond, Virginia 23218-1880 within 30 days to avoid the accrual of additional interest. If you have any questions about this determination, you may contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12875B
RE: 1821 Appeal: Withholding Taxation
Dear *****:
This will reply to your letter of in which you, on behalf of your client, applied for the correction of an assessment of withholding tax against ***** (the "Taxpayer') for the periods of January 1995 through December 1996. I apologize for the delay in responding.
FACTS
The Taxpayer is a janitorial contractor which was subject to an audit for the periods of January 1, 1995 through December 31, 1996. The Taxpayer was assessed for failure to withhold taxes from certain individuals whom the Taxpayer classified as independent contractors.
The Taxpayer's records show that the individuals in question were operating janitorial businesses. Under audit, neither the Taxpayer nor the department was able to substantiate the existence of most of the businesses. The few that were located indicated that they were required to wear the Taxpayer's uniform while on the job. These businesses also confirmed that they supplied their own cleaning equipment while the Taxpayer provided the cleaning supplies. All stated that they were permitted to use employees or subcontractors to complete the jobs. Although permitted to hold themselves out to public as a business, none worked for anyone other than the Taxpayer.
Subsequent to the audit, the Taxpayer has provided copies of subcontractor agreements for most of these janitorial businesses. All but two of the businesses submitted completed W-9 forms and certificates of insurance to the Taxpayer. There is also evidence that several organizations procured business licenses and incorporated in Virginia. Some of the organizations are listed in the phone book and have business cards. A few of the organizations were paying for unemployment benefits and worker's compensation.
The Taxpayer contends that it maintained an independent contractor relationship with the businesses and requests that the assessments be abated.
DETERMINATION
Code of Virginia Sec. 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 Sec.31.3121(d)-1 provides these factors, and is summarized in Internal Revenue Service Publication 937, copy enclosed. 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 the businesses.
In applying the 20 factor test, certain factors are to be given more weight than other factors. Factors which directly address whether an individual has control over another individual's work processes. For example, providing instructions to a worker about when, where and how to work is strong evidence of a employer/employee relationship while having a worker provide reports is less indicative of an employment relationship..
Several factors support an employer/employee relationship. The Taxpayer provided instruction in performing janitorial services to the businesses. Most of the businesses maintain an ongoing working relationship with the Taxpayer and the Taxpayer provides cleaning supplies and uniforms for the organizations.
There are also a number of factors that support an independent contractor relationship. The businesses were allowed to schedule their own hours and hired employees. The businesses provided cleaning equipment and incurred their own business related expenses.
The weight of the evidence between the Taxpayer and the businesses does not support an assertion of an employer/employee relationship. However, the Taxpayer did not supply satisfactory evidence to demonstrate that two of the businesses were independent contractors. In addition, the Taxpayer concedes that one individual listed in the audit was an employee. Accordingly, the withholding tax assessments have been adjusted to remove those individuals working for janitorial businesses classified as subcontractors.
The enclosed schedule shows the revised withholding tax, penalty and interest due. Please send your payment to ***** Office of Tax Policy, Virginia Department of Taxation, P.O. Box 1880, Richmond, Virginia 23218-1880 within 30 days to avoid the accrual of additional interest. If you have any questions about this determination, you may contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12875B
Rulings of the Tax Commissioner