The Taxman Cometh!
Companies May Not Escape Employment Taxes for 1099 Workers in Georgia by Attorney Charles D. “Chuck” Gabriel *
A July 25, 2010, ‘Biz Voice’ article in the Atlanta Journal Constitution (page D2) warned: “The term ‘independent contractor’ raises a red flag for the IRS.”
The IRS is not the only one who suspects employers of trying to avoid employment taxes. In point of fact the Georgia Department of Labor (DOL) tends to put the IRS to shame for two notable reasons. First, many individuals employed as independent contractors and paid by 1099 still seek unemployment insurance benefits when ‘laid off’. This opens a Pandora’s box of DOL verification queries for companies who are using 1099 workers to do the same job as would otherwise be performed by
W‐2 employees. Secondly, Georgia’s unemployment insurance premium tax exemption law is narrower than the federal independent contractor rules, even after the state amended the law in 2007.
Georgia employers need to be sensitive to the unique characteristics of the state law even if they believe they can satisfy the federal test for truly independent contractor workers.
Georgia’s statute now allows employers automatic exemption for the tax provided that for each exempt worker the employer has obtained an IRS favorable SS‐8 (Worker Status Determination Form) [O. C. G. A. § 34‐8‐35 (f)(2)]. Failing a favorable
IRS determination, employers bear the burden, after July 2007, to show that: (a) the worker has been and will continue to be free from control or direction over the performance of his services, both under the worker’s contract of service and in fact; and (b) the worker is customarily engaged in an independently established trade, occupation, profession, or business [O. C. G. A. § 34‐8‐35 (f)(1)].
With respect to workers initially engaged before July 1, 2007, the only way an employer can be found exempt in Georgia is to meet each of the following three statutory considerations: (1) the worker has been and will continue to be free from control or direction over the performance of his services, both under the worker ́s contract of service and in fact; 2) the worker’s service is outside the usual course of the business for which his service is performed or his service is performed outside of all the places of business of the enterprise for which his service is performed; and (3) the worker is customarily engaged in an independently established trade, occupation, profession, or business. Note that if any of the three subsections cannot be proven then the exemption is denied. Additionally, it is notoriously difficult to meet either of the alternatives within subsection 2, as Georgia interprets it.
For a pre‐2007 amendment worker’s service to be outside the employer’s usual course of business, the law contemplates circumstances like a lawn care worker maintaining a retail business’ exterior landscape. Failing that, the location where the worker performs services becomes telling. For example, if a janitorial company
contracts with its clients to perform services at its clients’ places of business, then 1099 workers performing those janitorial services for the company do not meet Georgia’s standard in subsection 2 [See Tanner v Brooks, 190 Ga. App. 228, 378 S.E. 2d 40 (1989)].
When the Georgia Department of Labor looks into whether a company paying a 1099 worker is exempt, the DOL will inquire under both the pre and post 2007 amendment law and then apply its determination to the entire class of similarly situated workers assessing back taxes, penalties and interest as appropriate.
The Biz Voice article suggested that economic uncertainty may be driving employers to avoid taxes through the use of 1099 workers. My advice to clients is: “Don’t make long term decisions on short term needs.” Penalties and interest can be stiff realities.
* Attorney Chuck Gabriel is the Managing Member of Pierce, Gabriel & Parker, LLC, a Civil Litigation Law Firm in Alpharetta, Ga. He can be reached at 678.735.5900 or by eMail at CDGabriel@PGP‐Law.com
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This article is not intended to provide legal advice: No relationship is established with Pierce, Gabriel & Parker, LLC, without an executed written engagement agreement.
