PLR 200351014: Contract dentist is an employee for federal employment tax purposes

Plain-English summary

A dentist asked the IRS to determine employment tax status for services provided to a federal agency under a contract. The contract gave the agency day-to-day supervisory authority, set work hours and leave terms, and barred the dentist from billing patients for covered services. The dentist also reported using the agency's premises and equipment, receiving hourly pay, and working only for that agency. The IRS ruled that the agency had enough direction and control to make the dentist an employee, with pay treated as wages for federal employment taxes and income tax withholding. It separately noted that service for the United States is excluded from employment under the federal unemployment tax provision.

Ruling snapshot

• Question: Was the contract dentist an employee or an independent contractor for federal employment tax purposes?
• Outcome: Advice given: the dentist was an employee and the payments were wages, subject to the stated federal government FUTA exception.
• Key authorities: IRC §§ 3121(d)(2), 3306(c)(6); Treas. Reg. §§ 31.3121(d)-1, 31.3401(c)-1.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200351014
Washington, DC 20224
Release Date: 12/19/2003
Index Number: 3121.04-01, 3306.05-00, Person to Contact: 3401.04-02
Telephone Number:

Refer Reply To:
CC:TEGE:EOEG:ET1-PLR-114083-03
Date:
September 02, 2003

Key:

Firm =

Worker =

Date =

Dear Sir or Madam:

This is in reply to a request for a ruling to determine the federal employment tax status of the above-named Worker with respect to services provided for a federal agency (Firm) from Date to the present. The federal employment taxes are those imposed by the Federal Insurance Contributions Act FICA), the Federal Unemployment Tax Act (FUTA), and the Collection of Income Tax at Source on Wages.

The Firm declined to provide information in this case. The Worker provides services as a general dentist under an Award/Contract, (Contract). Terms in the Contract state that the Worker is to provide services on the Firm’s behalf to its personnel, eligible employees, beneficiaries and dependents. Terms in the Contract further state that the Worker may not advise, recommend or suggest to the Firm’s clients to use the Worker’s

2
PLR-114083-03

services when not performing services for the Firm. Terms in the Contract also set the number of hours per week the services are to be provided, establish the Worker’s eligibility for accrued annual leave, sick leave and leave without pay. In addition, terms in the Contract provide that the Worker may not bill the Firm’s clients for services provided under the Contract.

The Contract states that the Worker’s services are to be subject to the day-to-day supervision and control by the Firm’s personnel in a manner comparable to the supervision and control exercised over its own personnel and employees engaged in comparable work. The Contract also states that the term “supervision and control” is defined as the process by which the worker receives technical guidance, direction, and approval with regard to an element of work or a series of tasks within the requirement of the Contract.

The Worker states that the services are provided on the Firm’s premises and that it provides the facilities, all materials, supplies and equipment, including specialty clothing, needed in the performance of those services. Services are provided 40 hours a week and payment for services rendered is on an hourly rate basis. Mandatory training and meetings are arranged by the Firm which also schedules the clients appointments. The Worker also indicates that similar services are not performed for others and that the relationship can be terminated by either party without incurring liability or penalty.

Section 3121(d)(2) of the Internal Revenue Code (the Code) defines “employee” as any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee.

The question of whether an individual is an employee under the common law rules or an independent contractor is one of fact to be determined upon consideration of the facts and the application of the law and regulations in a particular case. Guidance for determining the existence of that status is found in two substantially similar sections of the applicable Employment Tax Regulations: section 31.3121(d)-1 relating to the Federal Insurance Contributions Act (FICA), and section 31.3401(c)-1 relating to federal income tax withholding.

Section 31.3121(d)-1(c)(2) of the regulations provides that generally, the relationship of employer-employee exists when the person for whom the services are performed has the right to direct and control the individual who performs the services not only as to the result to be accomplished by the work, but also as to the details and means by which that result is accomplished. It is not necessary that the employer actually direct or control the manner in which the services are performed, it is sufficient if he or she has the right to do so.

Section 31.3121(d)-1(a)(3) of the regulations provides that if the relationship of an employer and employee exists, the designation or description of the relationship by the parties as anything other than that of employer and employee is immaterial. Thus, if an

3
PLR-114083-03

employer-employee relationship exists, it is of no consequence that the employee is designated as partner, coadventurer, agent, or independent contractor or the like. In determining whether an individual is an employee or an independent contractor under the common law, all evidence of both control and lack of control or autonomy must be considered. In doing so, one must examine the relationship of the worker and the business. Relevant facts generally fall into three categories: (1) behavioral controls, (2) financial controls, and (3) the relationship of the parties.

Behavioral controls are evidenced by facts which illustrate whether the service recipient has a right to direct or control how the worker performs the specific tasks for which he or she is hired. Facts which illustrate whether there is a right to control how a worker performs a task include the provision of training or instruction.

Financial controls are evidenced by facts which illustrate whether the service recipient has a right to direct or control the financial aspects of the worker’s activities. These factors include whether a worker has made a significant investment, has unreimbursed expenses, and makes services available to the relevant market; the method of payment; and the opportunity for profit or loss.

The relationship of the parties is generally evidenced by the parties’ agreements and actions with respect to each other, including facts which show not only how they perceive their own relationship but also how they represent their relationship to others. Facts which illustrate how the parties perceive their relationship include the intent of the parties as expressed in written contracts, the provision of or lack of employee benefits, the right of the parties to terminate the relationship, the permanency of the relationship, and whether the services performed are part of the service recipient’s regular business activities.

Based on the information submitted, it is determined that the services performed by the Worker are sufficiently subject to the direction and control by the Firm to establish an employer-employee relationship. Accordingly, it is held that the Worker is an employee of the Firm and amounts paid for services provided are wages, subject to federal employment taxes and income tax withholding.

Section 3306(c)(6) of the Code, pertaining to the FUTA, provides that service performed in the employ of the United States Government are excepted from the definition of employment.

This ruling is applicable to any individuals engaged by the Firm under similar

4
PLR-114083-03

circumstances. The Firm is responsible for advising all of the affected workers of the results of this ruling.

This ruling is directed only to the taxpayer(s) to whom it is addressed. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

Sincerely,

WILL E. MCLEOD
Chief, Employment Tax Branch 1
Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities)

Enclosure:
Copy of ruling letter for 6110 purposes