Booth Rental Upheld As Valid Independent Contractor Strategy

Originally published on Passive Activities and Other Oxymorons on December 1, 2010

Cheryl A. Mayfield Therapy Center, et al. v. Commissioner, TC Memo 2010-239


I sometimes come up with little rules of thumb to answer fairly complicated questions. One is the employee/independent contractor question. There is a twenty factor test (I'll share the 20 factors later in the post). My simple answer is that if you ask the question they are employees. Suppose you say that all those people are "independent contractors". And let's further suppose that one of your employees (Oh sorry. Meant to say "independent contractors") becomes disgruntled when they bring their 1099 to the likes of Refunds Now Inc to have their tax return prepared so they can get a big screen TV and find out they actually owe money. Somebody might mention to them that they could file Form SS-8 with the IRS. This will potentially save them the difference between SE tax and employee share of social security tax. More to the point it will make your life utterly miserable.

Employers do sometimes win against the IRS on independent contractor cases. Cheryl A. Mayfield Therapy Center (The Center) was assessed close to $100,000 in employment taxes. They were able to establish that the massage therapists, cosmetologists and nail technicians they worked with were, in fact, independent contractors.

The way they operated was to charge a minimum booth rent to the service providers and take a percentage of their gross. The providers were in fact quite independent. They furnished their booths and pretty much made their own schedule. There was a standard price schedule, but they could vary from it. They bought most of their own supplies.

What is troubling about this case is that it seems so obvious these people were independent, but the IRS still went after them. Below are the famous twenty factors:

(1) The putative employer's right to require compliance with instructions;
(2) training by the putative employer;
(3) integration of the worker's services into business operations;
(4) a requirement that the worker's services be rendered personally;
(5) the putative employer's hiring, supervising, and paying assistants;
(6) a continuing relationship;
(7) set hours of work;
(8) a requirement that the worker devote substantially full time for the putative employer rather than being free to work when and for whom he or she chooses;
(9) doing work on the putative employer's premises;
(10) requiring the worker to perform services in the order or sequence set by the putative employer;
(11) requiring the worker to submit oral or written reports;
(12) paying by the hour, week, or month, rather than by the job or on a straight commission;
(13) paying business and travel expenses;
(14) furnishing tools and materials;
(15) a lack of significant investment by the worker;
(16) an absence of ability by the worker to realize a profit or suffer a loss;
(17) working for no more than one firm at a time;
(18) the worker's not making his or her services available to the general public on a regular and consistent basis;
(19) a right to discharge the worker;
(20) a right by the worker to terminate the relationship without incurring liability.