I moonlight as a contract nurse on a 1099 and claim business expenses — do I owe gross receipts tax on that pay, or is it exempt wages?

Plain-English summary

A nurse who moonlighted as a "contract nurse" on a 1099 was an independent contractor, not an employee — so her pay was subject to gross receipts tax, not exempt wages. It was a close call, but she knew she was hired as a contractor with no benefits and reported the income as self-employment (with business deductions) on her federal return. Protest DENIED.

Martha Parrell, a registered nurse, worked full-time as an employee for Olsten (a home-health agency that gave her a W-2) while also taking part-time contract work for Educare, which ran group homes in Las Cruces for clients needing 24-hour care. Educare paid her on a Form 1099 ($40,883.75 for 1995) with no withholding, no workers' compensation, no unemployment insurance, and no leave. Her duties included dispensing medications on the doctors' schedules, arranging refills, training caregivers, giving inoculations, attending team conferences, and being on call. The Department, using IRS data, assessed $2,450.10 in gross receipts tax plus penalty and interest for 1995. The Parrells protested, arguing the Educare pay was exempt employee wages under Section 7-9-17.

Employee or independent contractor — the right-to-control test

Because "employee" is not defined in the tax act, the hearing officer applied the common-law right-to-control test (Burruss v. B.M.C. Logging; Harger v. Structural Services) and the Department's indicia in Regulation 3 NMAC 2.12.7. He called it "an especially difficult case," with facts pointing both ways:

• Toward employee: Educare supplied all the medical equipment, supplies, and an office (desk and phone); provided support for her trainings; paid an hourly rate for some duties; and treated her much as Olsten did, and Olsten treated her as an employee.
• Toward independent contractor: Educare did not closely direct how she did her work — it cared about the result (clients getting timely, professional care); the two nurses set their own schedules; she was largely paid per patient visit; and — most compelling — she knew from the outset she was hired on a contract basis with no employee benefits, and she treated herself that way on her taxes.

Her own federal reporting tipped the balance — and the Flure exception did not apply

New Mexico generally requires taxpayers to report consistently for state and federal purposes (Co-Con; Stohr; Sutin, Thayer & Browne). Mrs. Parrell filed a federal Schedule C listing herself as proprietor of a "nursing (on contract)" business and claimed business expenses (vehicle interest, laundry, equipment rent, and more) against the income. The hearing officer acknowledged a narrow exception recognized in a companion 2000 decision, D&O 00-24 (Flure), where a mistaken Schedule C did not bind a taxpayer because it gave him no benefit and reflected no intent to be a contractor. But that exception did not fit here: Mrs. Parrell received a federal tax benefit from the Schedule C deductions and understood she was being treated as an independent contractor. Combined with her acceptance of contract terms and her consistent self-employment reporting, the hearing officer was persuaded she was an independent contractor, so her Educare pay was not exempt wages.

Result: protest DENIED — the Educare compensation was taxable gross receipts.

What this means for you

Moonlighting on a 1099 usually means gross receipts tax

If you take side work as a contractor and are paid on a 1099, that pay is generally subject to New Mexico gross receipts tax. The wage exemption is only for genuine employees, and being an employee at your main job does not make your contract work exempt.

How you report it federally can decide the state question

Filing a Schedule C as a self-employed proprietor — and claiming business deductions — is strong evidence you are an independent contractor, and New Mexico holds you to that consistent treatment. If you truly believe you are an employee, do not report the pay as self-employment income and take business write-offs against it; that reporting will work against you on the state tax.

Understanding and accepting "contract, no benefits" terms matters

The hearing officer found it most telling that Mrs. Parrell knew she was hired as a contractor without benefits and accepted the job on those terms. When both sides understand the arrangement is a contract and you are paid accordingly (here, largely per visit), that shared understanding weighs heavily toward independent-contractor status.

The "no benefit, no intent" exception is narrow

A mistaken Schedule C spared the taxpayer in the companion Flure decision, but only because it gave him no tax advantage and reflected no choice to be a contractor. If you claimed deductions or otherwise benefited from self-employment treatment, that exception will not rescue you.

Common questions

Q: I have a regular W-2 job and also do 1099 side work. Is the side pay exempt from gross receipts tax?
A: Generally no. The exemption is for employee wages. If your side work is as an independent contractor paid on a 1099, that pay is subject to gross receipts tax, regardless of your employee status elsewhere.

Q: I think I was really an employee of the company that paid me on a 1099. Can I claim the exemption?
A: Only if the facts show you were an employee under the right-to-control test — and your own tax reporting must be consistent. Here the nurse set her own schedule, was paid per visit, knew she was a contractor, and filed a Schedule C with deductions, so she was treated as a contractor and owed the tax.

Q: I filed a Schedule C and took business deductions. Does that hurt my case?
A: Yes. Reporting the income as self-employment and claiming business expenses is strong evidence of independent-contractor status, and New Mexico requires consistent federal and state treatment. It made the difference against the exemption here.

Q: Didn't another 2000 decision let someone win despite a Schedule C?
A: Yes — D&O 00-24 (Flure) — but only because that Schedule C gave the worker no tax benefit and reflected no intent to be a contractor. That narrow exception did not apply to a taxpayer who benefited from the filing and understood she was a contractor.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-9-17 — receipts of employees from wages, salaries, commissions, or other remuneration for personal services are exempt from gross receipts tax
• Regulation 3 NMAC 2.12.7 — indicia the Department uses to determine employee status (wage/salary, income-tax withholding, FICA, workers' comp, unemployment contributions, whether the employer treats the person as an employee, and control over the means versus only the result)

Cases and decisions cited:

• Burruss v. B.M.C. Logging Co., 38 N.M. 254, 31 P.2d 263 (1934) — the principal consideration in classifying a worker is the right to control the manner and method of the work
• Harger v. Structural Services, Inc., 121 N.M. 657, 916 P.2d 1324 (1996) — adopts the Restatement (Second) of Agency § 220 multi-factor control test
• Co-Con, Inc. v. Bureau of Revenue, 87 N.M. 118, 529 P.2d 1239 (Ct. App. 1974); Stohr v. New Mexico Bureau of Revenue, 90 N.M. 43, 559 P.2d 420 (Ct. App. 1976); Sutin, Thayer & Browne v. Revenue Division, 104 N.M. 633, 725 P.2d 833 (Ct. App. 1985) — taxpayers must report consistently for state and federal purposes
• In re Protest of Michael L. Flure, Decision and Order No. 00-24 — recognized a narrow exception to the consistency rule where a Schedule C gave the taxpayer no federal benefit and reflected no intent to be a contractor (held inapplicable here)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Thomas M. and Martha L. Parrell
• Decision PDF: D&O 00-26

Original ruling text

THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO

IN THE MATTER OF THE PROTEST OF
THOMAS M. AND MARTHA L. PARRELL NO. 00-26
ID. NO. 02-392149-00 8, PROTEST TO
ASSESSMENT NO. 2354228

DECISION AND ORDER

This matter came on for formal hearing on July 28, 2000 before Gerald B. Richardson,

Hearing Officer. Thomas and Martha Parrell, hereinafter, “Taxpayers”, were represented by

Martha Parrell. The Taxation and Revenue Department, hereinafter, “Department”, was

represented by Donald F. Harris, Special Assistant Attorney General. Based upon the evidence

and arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. On March 12, 1999, the Department issued Assessment No. 2354228 to the Taxpayers,

assessing $2,450.10 in gross receipts tax, $245.02 in penalty and $1,255.68 in interest for

reporting periods January through December, 1995.

2. On April 5, 1999, the Taxpayers filed a written protest to Assessment No. 2354228.

3. The basis of the Department’s assessment is that it received information from the Internal

Revenue Service (“IRS”) that the Taxpayers had reported $40,883.75 of gross receipts from a

business or profession on a Federal Schedule C for the 1995 tax year which were not reported to

the Department for gross receipts tax purposes.

4. The amounts reported on the Taxpayers’ 1995 Schedule C were amounts that Mrs. Parrell

received as compensation from Educare Community Living Corporation, hereinafter, “Educare,”

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for nursing services during 1995. These amounts were reported by Educare to the Taxpayer and

the IRS on a Federal Form 1099 as medical and health care payments.

5. Mrs. Parrell is a registered nurse.

6. In 1995, Mrs. Parrell was working as a full time employee for another home health care

agency, Olsten-Kimberly Quality Care, hereinafter, “Olsten”. She was approached by Educare

to work for them on a part-time basis as a contract nurse. Educare understood that this work

would be in addition to Mrs. Parrell’s work for Olsten-Kimberly Quality Care.

7. Mrs. Parrell agreed to be a contract nurse for Educare in early 1995.

8. Educare owned and operated four or five group homes in Las Cruces, New Mexico for

mentally delayed and physically delayed clients who required 24 hour care. Although those

facilities were staffed with caregivers around the clock, the caregivers were not qualified to

dispense medication and do other medical procedures.

9. Mrs. Parrell’s primary duty was dispensing medications to Educare’s clients at the times

specified by the client’s doctor. Sometimes this meant tracking the client down at the place a

client worked or an event the client was taken to. Mrs. Parrell also ensured that refills were

obtained in a timely manner and that the caregiver staff was trained about medication side effects

and what to watch for. She also was an instructor for Educare employees, training them on such

subjects as back safety, prevention of communicable diseases, diet and nutrition. She gave

inoculations to Educare employees. She also attended team conferences where a client’s

caregivers, treating physician, and parents conferred about a client’s treatment plan. Finally,

Mrs. Parrell’s nursing duties also included being on call, 24 hours a day, on certain days, in order

to attend to unexpected medical situations involving Educare clients.

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10. Mrs. Parrell was one of two registered nurses who performed nursing services for

Educare in Las Cruces. Both nurses were aware of the Educare clients and their medication

schedules which needed to be covered. Generally, the nurses worked out the schedule between

themselves to provide nursing coverage for the Educare clients as well as the schedule as to who

would be on call on any given day. Educare was kept informed of the schedule so that they

would know which nurse was responsible for providing coverage at any given time.

11. On average, Mrs. Parrell spent about one hour a day at the Educare offices. She used this

time to update and audit the patient files, fill out her time sheets, discuss patient treatments with

treating physicians, order prescription refills, prepare correspondence, etc.

12. Educare provided Mrs. Parrell with a desk and telephone at the Educare offices.

13. Educare furnished all medical equipment and supplies needed by Mrs. Parrell in the

performance of her nursing duties. Educare offered to pay for a pager and paging service, but

since Mrs. Parrell already had a pager provided by Olsten, Mrs. Parrell declined another pager.

14. When Mrs. Parrell was planning to provide a staff training for Educare, the Educare staff

would arrange to set up a room, make copies of handouts, arrange to provide a television and a

VCR and otherwise take care of the set up for the meeting.

15. Educare paid Mrs. Parrell $15 per patient visit. She was also compensated $15 per hour

for her office time and training time. She was also paid a lesser hourly amount for the time when

she was on call.

16. Mrs. Parrell had no taxes or other withholdings from her paychecks from Educare, nor

was she provided worker’s compensation or unemployment insurance. She accumulated no sick

or annual leave from Educare.

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17. Mrs. Parrel wore a nurse’s uniform while performing nursing services for both Educare

and Olsten. She provided her own uniform, which was customary in the nursing profession.

18. Mrs. Parrell received no compensation or reimbursement for mileage or travel expenses

incurred in visiting patients from either Educare or Olsten.

19. Mrs. Parrell performed nursing services for Olsten in much the same manner she did for

Educare. Mrs. Parrell made calls upon Olsten patients to dispense medication. She was also

required to be on call at various times. She was sometimes on call for both Olsten and Educare

at the same time. Olsten was aware that Mrs. Parrell was working for Educare at the same time

she was working for them.

20. Olsten treated Mrs. Parrell as an employee. It reported her compensation to her and the

IRS on a W-2 form, withheld taxes, etc. Olsten also paid Mrs. Parrell on a per visit basis with an

hourly rate for times she was on call. At Olsten, there was a sign up sheet for Mrs. Parrell and

the other Olsten nurses to fill out for times when they would take the responsibility for being on

call.

21. Other than the difference in the manner in which Olsten and Educare handled the

reporting of her compensation to her and the IRS and the fact that Educare did not withhold taxes

or provide unemployment or worker’s compensation insurance, Mrs. Parrell did not perceive any

difference in how she was treated or directed by either agency in terms of her job assignments

and duties.

22. Sometime in mid-1995, Mrs. Parrell quit Olsten and went to work for another home

health care provider, First American Healthcare. First American Healthcare also treated Mrs.

Parrell as an employee. The only difference between Mrs. Parrell’s treatment by Olsten and First

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American Healthcare is that First American Healthcare provided vacation time and sick leave

and offered medical insurance coverage.

23. Mrs. Parrell continued to perform nursing services for Educare after she switched

employment to First American Healthcare.

24. The Taxpayer’s 1995 Federal Schedule C listed Mrs. Parrell as the proprietor of the

business and listed the principal business as “nursing (on contract)”. In addition to listing gross

receipts from Educare in the amount of $40,883.75, Mrs. Parrell claimed expenses as follows:

insurance $ 139.36
interest (business car) $1,153.00
laundry $ 700.00
rent (of vehicles, machinery
and equipment) $1,261.00
taxes and licenses $ 198.00

DISCUSSION

The issue to be determined is whether the compensation the Taxpayer received from

Educare was compensation for services performed as an employee or as an independent

contractor. This is because there is an exemption from gross receipts tax for the receipts of

employees from wages, salaries, commissions or other remuneration for personal services.

Section 7-9-17 NMSA 1978.

An employee is not defined in the Gross Receipts and Compensating Tax Act, Chapter 7,

Article 9 NMSA 1978, so we will look to the common law definition of employee. In

determining whether a person is an employee or an independent contractor, the rule in New

Mexico and in general is that the principal consideration is the right to control. Thus, the

relationship of employer and employee usually results where there is control over the manner

and method of performance of the work to be performed. Where there is only control over the

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results, however, and not the details of the performance, the worker is usually considered to be

an independent contractor. Buruss v. B.M.C. Logging Co., 38 N.M. 254, 31 P.2d 263 (1934). A

more recent pronouncement of this rule can be found in Harger v. Structural Services, Inc., 121

N.M. 657, 663, 916 P.2d 1324, 1330 (1996). In that case the New Mexico Supreme Court

adopted the approach set out in the Restatement (Second) of Agency § 220(1) to determine a

worker’s status as an employee or an independent contractor:

The important distinction is between service in which the actor’s
physical activities and his time are surrendered to the control of the
master, as service under an agreement to accomplish results or to
use care and skill in accomplishing results. Those rendering
service but retaining control over the manner of doing it are not
servants.

Among the factors to be considered are: whether the party employed engages in a distinct

occupation or business; whether the work is part of the employer’s regular business; the skill

required in the particular occupation; whether the employer supplies the instrumentalities, tools

or the place of work; the duration of a person’s employment and whether that person works full-

time or regular hours; whether the parties believe they have created the relationship of employer

and employee and the manner and method of payment. The totality of all of the circumstances

must be considered in determining whether the employer has the right to exercise that degree of

control over a worker so as to make the worker an employee.

The Department has adopted a regulation under Section 7-9-17 to provide criteria by

which the status of a worker may be determined. Regulation 3 NMAC 2.12.7. provides as

follows:

In determining whether a person is an employee, the department
will consider the following indicia:

1. is the person paid a wage or salary;
2. is the “employer” required to withhold income tax from the
   person’s wage or salary;

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3. is F.I.C.A. tax required to be paid by the “employer”;
4. is the person covered by workmen’s compensation insurance;
5. is the “employer” required to make unemployment insurance
   contributions on behalf of the person;
6. does the person’s “employer” consider the person to be an
   employee;
7. does the person’s “employer” have a right to exercise control
   over the means of accomplishing a result or only over the
   result (control does not mean “mere suggestion’).
   If all of the indicia mentioned are present, the department will
   presume that the person is an employee. However, a person may
   be an employee even if one or more of the indicia are not present.

The facts of this case present an especially difficult case for determining whether Mrs.

Parrell was an employee or an independent contractor of Educare. This is because there are

aspects of the relationship between Mrs. Parrell and Educare which would support either result.

The facts which would support a conclusion that Mrs. Parrell was an employee are that

she was provided with all necessary supplies and equipment to do her job1, as well as an office.

Educare provided the office support for the trainings she gave. She received an hourly wage for

some of her duties. Perhaps the most compelling fact is that except for the withholding of taxes

and insurance fees, Mrs. Parrell was treated the same and her work was handled in much the

same manner as she was by Olsten, who treated Mrs. Parrell as an employee.

On the other hand, there were many facts which would support a conclusion that Mrs.

Parrell was an independent contractor. She was not closely directed or controlled by Educare as

to the methods by which she carried out her job duties. She and the other nurse worked out the

schedule between themselves, with Educare being primarily concerned with the result, that its

patients received their medications and other nursing care in a timely and professional manner.

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Educare did not provide Mrs. Parrell’s uniforms, but Mrs. Parrell testified that it was standard practice for nurses to
provide their own uniforms, a fact borne out by the fact that Olsten, which treated Mrs. Parrell as an employee, did
not provide her uniforms, either. Additionally, neither Educare or Olsten provided vehicles for Mrs. Parrell to use
when carrying out her duties, nor did either provide her reimbursement for the mileage she incurred in performing
her duties.

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She was paid by the patient visit for all but her time in the office and on-call. Perhaps the most

compelling fact which supports a conclusion that she was an independent contractor, however, is

that she was aware from the outset of her engagement with Educare that she was being hired on a

contract basis with no employee benefits. She also treated herself consistently with that status

when she filed Schedule C of her federal income tax return.

In general, the law in New Mexico is that taxpayers must file consistently for both state

and federal purposes. Co-Con, Inc. v. Bureau of Revenue, 87 N.M. 118, 259 P.2d 1239 (Ct.

App. 1974) cert. denied, 87 NM. 111, 529 P.2d 1232 (1974), Stohr v. New Mexico Bureau of

Revenue, 90 NM. 43, 559 P.2d 420 (Ct. App. 1976) cert. denied, 90 N.M. 254, 561 P.2d 1347

(1977), Sutin, Thayer & Browne v. Revenue Division of the Taxation and Revenue

Department, 104 N.M. 633, 725 P.2d 833 (Ct App. 1985), 102 NM 293, 694 P.2d 1358 (1986).

A recent administrative decision found an exception to that rule in the context of the issue in this

case, whether a taxpayer was an independent contractor or an employee, where the taxpayer

received no federal tax benefit from reporting his compensation on a Federal Schedule C and the

taxpayer never intended to treat himself as an independent contractor by filing the Schedule C.

In the Matter of the Protest of Michael L. Flure, Decision and Order No. 00-24. That

exception would not apply in this case because the Taxpayers did receive a federal tax benefit

from the filing of the Schedule C in that a number of expenses were claimed against the income

reported and Mrs. Parrell understood that she was being treated as an independent contractor by

Educare.

In this case, I am persuaded that Mrs. Parrell was an independent contractor and not an

employee of Educare. Most persuasive in arriving at this conclusion was Mrs. Parrell’s

understanding that she was being treated as an independent contractor by Educare and her

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acceptance of her position on those terms, combined with her treating her compensation

consistently with that of an independent contractor for federal income tax purposes.

CONCLUSIONS OF LAW

1. The Taxpayers filed a timely, written protest of Assessment No. 2354288 and jurisdiction

lies over the parties and the subject matter of this protest.

2. Mrs. Parrell’s compensation received from Educare was received in the capacity of an

independent contractor.

3. The Taxpayers are not entitled to an exemption, pursuant to Section 7-9-17 NMSA 1978,

for the compensation Mrs. Parrell received from Educare because that compensation was not

received as an employee of Educare.

For the foregoing reasons, the Taxpayers’ protest IS HEREBY DENIED.

DONE, this 31st day of August, 2000.

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