In Pediatric Impressions Home Health, Inc. v. Commissioner (T.C. Memo. 2022-35), the Tax Court held, on April 12, 2022, that a corporation engaged in the business of providing at-home private duty nursing services to children with special needs misclassified approximately 99 nurses it hired to perform such services during tax years 2016 through 2018 as independent contractors and was therefore liable for employment taxes on the nurses’ wages as well as various penalties relating to the underpayment of taxes and tax deposits.
The Internal Revenue Service states the criteria to distinguish an independent contractor versus an employee. Whether a worker is an independent contractor, or an employee depends on the relationship between the worker and the business. According to the IRS, there are, generally, three categories to consider:
- Behavioral control. Does the company control or have the right to control what the worker does and how the worker does the job?
- Relationship of the parties. Are there written contracts or employee type benefits such as pension plan, insurance, vacation pay? Will the relationship continue and is the work performed a key aspect of the business?
- Financial control. Does the business direct or control the financial and business aspects of the worker’s job. Are the business aspects of the worker’s job controlled by the payer? Things like how the worker is paid, are expenses reimbursed, who provides tools/supplies, etc.
When workers are misclassified as independent contractors it adversely affects the workers because the employer’s share of taxes is not paid, and the employee’s share is not withheld.
Backgrounds
Pediatric Impressions Home Health, Inc is a company engaged in the business of providing at-home private duty nursing services to children with special needs. During 2016 to 2018, it hired nurses to perform these services on its behalf.
- Pediatric Impressions required the nurse to complete a written job application, pass a background check, and complete a nursing skills assessment it administered.
- Pediatric Impressions also verified the applicant’s nursing credentials, ensured the applicant did not have any professional infractions, checked references, and confirmed that the individual was adequately trained.
- The nurses signed a contract for services and Pediatric Impressions hired the nurses on a permanent basis for an indefinite period, and normally told the nurses that they were “employed” on a “full-time” basis.
- The nurses were supervised by Ify Agbo, Pediatric Impressions’ administrator, president, and sole shareholder during 2016-2018, along with case managers employed by the company.
- Insurance companies assigned a patient to Pediatric Impressions, who would then assign a nurse to that patient, among others.
- Pediatric Impressions paid the nurses an hourly rate based on timesheets they submitted and did not offer the nurses benefits such as health insurance, paid time off, or retirement benefits, but did occasionally pay incentive or performance bonuses.
- Pediatric Impressions, not the nurses, received payment for the nursing services. The nurses had no contact with the patients’ insurance companies, the state, or Medicaid. Pediatric Impressions represented to the patients and their legal guardians that the nurses worked for Pediatric Impressions.
- Pediatric Impressions also reimbursed the nurses for certain transportation costs.
It is noted that before 2016, Pediatric Impressions treated the nurses as employees for federal employment tax purposes. Starting in 2016, the company unilaterally began treating many of the nurses as independent contractors. The jobs performed and services provided by the nurses, including Pediatric Impressions’ supervision thereof, however, remained the same following this change in employment status.
The Audit
After an audit for tax years 2016-2018, the IRS issued Pediatric Impressions a notice of determination after it concluded that that: 1) Pediatric Impressions had not properly classified the nurses as independent contractors rather than employees during the tax periods at issue; 2) Pediatric Impressions was not entitled to Section 530 relief; and 3) Pediatric Impressions was liable for federal employment taxes, additions to tax under Code Section 6651 for underpayments of tax, and penalties under Code Section 66565 for underpayments of employment tax deposits with respect to the periods at issue.
The Ruling
In its determination that the nurses were employees, the court cited five factors, including the degree of control exercised by the corporation, the opportunity for profit or loss, the lack of investments made by the workers in the business, the skill and initiative required, and the fact that the corporation could fire a worker at will while the worker had to give two weeks’ notice before leaving.
1. Degree of Control. Pediatric Impressions functioned as a gatekeeper between the nurses and the patients by subjecting the nurses to a thorough hiring and background review process, having the exclusive say as to which nurses worked with which patients, controlling the nurses’ working hours, and annually reassessing and evaluating the nurses.
2. Opportunity for Profit or Loss. Pediatrics Impressions received payment for the nursing services, the nurses did not share in Pediatrics Impressions’ profits, the nurses only rarely received performance bonuses, and the nurses bore no risk of loss from the services they provided on behalf of the company.
3. Relative Investments. The nurses had almost no capital investment in the job as Pediatrics Impressions was responsible for providing the supervision, training, and supplies needed for the nurses to perform their nursing services, and Pediatrics Impressions also reimbursed the nurses for out-of-pocket expenses such as transportation costs if they had to escort patients to and from their residences.
4. Permanency of the Relationship and Right to Discharge. While Pediatrics Impressions and the nurses had the mutual ability to terminate their working relationship, only the nurses were required to provide two weeks’ notice.
5. Skill and Initiative Required. While Pediatrics Impressions required each nurse to have certain nursing skills and knowledge, once a nurse was on the job a patient’s plan of care specified how the nurse was to complete the assigned tasks and significant initiative on the part of the nurses was not necessary for them to receive consistent work.
Finally, the court found that Pediatric Impressions presented little evidence to support a finding of reasonable cause to abate the penalties. The court noted that Pediatric Impressions’ administrator, president, and sole shareholder, Ms. Agbo, testified that she decided to change the classification of its workers on the advice of the company’s CPA, but she failed to offer any evidence to support her claim.
Business owners should seek proper advice and ensure that employees and independent contractors are correctly classified to avoid being audited as in the case of Pediatric Impressions Home Health, Inc.
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