Tax Type
Employer Income Tax Withholding
Description
Employee, Independent Contractor Defined
Topic
Withholding of Tax
Date Issued
09-09-1999
September 9, 1999
Re: Section 58.1-1821 Application: Withholding Tax
Dear*****
This will respond to your letter in which you contest the assessment of withholding tax made against ***** (the "Taxpayer') for the 1996 taxable year. I apologize for the delay in responding.
FACTS
The Taxpayer was assessed withholding tax, penalty and interest for failing to withhold Virginia taxes from one worker during the 1996 taxable year. Prior to 1996, this worker was classified as the Taxpayer's employee. The Taxpayer requests a refund of tax, penalty and interest paid on the assessment because he contends that the assessments are incorrect because the worker's status changed from an employee to an independent contractor.
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 contr actor' 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. 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.
The department requested you to provide information to substantiate the Taxpayer's treatment of the worker as an independent contractor by its letter of June 29, 1999. The Taxpayer has not provided the requested evidence. Therefore, because no clear and cogent evidence has been provided that would indicate that this individual acted in the capacity of an independent contractor, the individual performing the services for or on behalf of the Taxpayer is deemed to have an employee/employer relationship with the Taxpayer.
The term "employer' is defined by Code of Virginia Sec. 58.1-460 as "[T]he person ... for whom an individual performs or performed any service as an employee...' Code of Virginia Sec. 58.1-461 provides that employers must withhold taxes on wages of employees. Because the worker performing the services is an employee, taxes must be withheld from his wages for each payroll period. Consequently, the Taxpayer is liable for withholding taxes on this individual. Accordingly, withholding taxes were assessed when it could not be determined if the individual in question included his payment when he filed his individual income taxes.
Code of Virginia Sec. 58.1-467 provides that if an employer fails to withhold tax, but the employee pays the tax on his wages, the employer will be only liable for penalty and interest on the tax that he failed to withhold. As such, the audit will reflect Virginia individual return information filed by the Taxpayer's employee. Therefore, the Taxpayer will only be liable for penalty and interest on the tax that should have been withheld.
Accordingly, a refund will be issued for the amount of tax assessed. If you have any questions about this determination, you may contact ***** at *****
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13461B
Re: Section 58.1-1821 Application: Withholding Tax
Dear*****
This will respond to your letter in which you contest the assessment of withholding tax made against ***** (the "Taxpayer') for the 1996 taxable year. I apologize for the delay in responding.
FACTS
The Taxpayer was assessed withholding tax, penalty and interest for failing to withhold Virginia taxes from one worker during the 1996 taxable year. Prior to 1996, this worker was classified as the Taxpayer's employee. The Taxpayer requests a refund of tax, penalty and interest paid on the assessment because he contends that the assessments are incorrect because the worker's status changed from an employee to an independent contractor.
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 contr actor' 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. 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.
The department requested you to provide information to substantiate the Taxpayer's treatment of the worker as an independent contractor by its letter of June 29, 1999. The Taxpayer has not provided the requested evidence. Therefore, because no clear and cogent evidence has been provided that would indicate that this individual acted in the capacity of an independent contractor, the individual performing the services for or on behalf of the Taxpayer is deemed to have an employee/employer relationship with the Taxpayer.
The term "employer' is defined by Code of Virginia Sec. 58.1-460 as "[T]he person ... for whom an individual performs or performed any service as an employee...' Code of Virginia Sec. 58.1-461 provides that employers must withhold taxes on wages of employees. Because the worker performing the services is an employee, taxes must be withheld from his wages for each payroll period. Consequently, the Taxpayer is liable for withholding taxes on this individual. Accordingly, withholding taxes were assessed when it could not be determined if the individual in question included his payment when he filed his individual income taxes.
Code of Virginia Sec. 58.1-467 provides that if an employer fails to withhold tax, but the employee pays the tax on his wages, the employer will be only liable for penalty and interest on the tax that he failed to withhold. As such, the audit will reflect Virginia individual return information filed by the Taxpayer's employee. Therefore, the Taxpayer will only be liable for penalty and interest on the tax that should have been withheld.
Accordingly, a refund will be issued for the amount of tax assessed. If you have any questions about this determination, you may contact ***** at *****
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13461B
Rulings of the Tax Commissioner