Is an individual service provider an employee or an independent contractor?  As our employee benefits colleagues have noted previously in Covington’s Inside Compensation blog, the IRS test is complicated and just one of many for determining worker status under federal and state laws.  The American Workers, Families, and Employers Assistance Act (the “Bill”), one of a series of COVID-19 relief bills released by Senate Republicans, would address one aspect of worker classification during the COVID-19 pandemic.  Specifically, Section 214 of the Bill would provide that certain COVID-19 related benefits provided to an individual would not be taken into account in determining worker classification under the Code.  Section 214 further provides that such benefits (other than cash payments) would generally be considered qualified disaster relief payments under Code Section 139.

Worker Classification Under the Internal Revenue Code

The IRS test for determining worker classification is multi-factor, and generally considers the following:

  • Behavioral Control. To determine classification under the Code, the IRS will consider the level of behavioral control, which means the level of control that the business has over work performed by the worker—generally, the greater the level of control, the greater the likelihood that a worker will be deemed to be an employee.  Evidence of behavioral control could include instruction or training provided to a worker by the business.
  • Financial Control. Financial control is another relevant factor, and refers to the degree to which a business has the right to direct or control the financial aspects of a worker’s job.  As with behavioral control, greater levels of financial control generally increase the likelihood that an employee-employer relationship exists.  Evidence of financial control might include proof that a business pays or reimburses expenses incurred by a worker during the course of service.  Financial control could also be evidenced by a business providing the tools and equipment utilized by the worker during the course of his or her service.
  • Type of Relationship. Worker classification under the Code will also take into account additional evidence indicative of an employee-employer relationship, for example, whether the business provides employee-type benefits such as health insurance and sick pay to workers.

COVID-19 Assistance Under the Bill

Section 214 of the Bill provides that the IRS worker classification test would not take into account certain COVID-19 assistance for determining employee status.  This section of the Bill would only apply to the test for worker classification under the Code, and would not impact classification under state or other federal laws, however.  Under Section 214, examples of such COVID-19 assistance would include the following:

  • (1) financial assistance provided while the worker is not performing services or is performing reduced services or hours due to COVID-19;
  • (2) health care benefits related to COVID-19, such as testing for COVID-19 (including antibody testing);
  • (3) equipment to protect against COVID-19 infection, such as masks, gloves, and disinfectants;
  • (4) cleaning products or services related to preventing the spread of COVID-19; and
  • (5) training, standards, and guidelines or other similar information provided to a worker related to COVID-19.

With the exception of the financial assistance described in item (1), all other COVID-19 assistance would generally be treated as a qualified disaster relief payment for purposes of Code Section 139.  As explained in an earlier blog post, qualified disaster relief payments are payments made to reimburse or pay for expenses resulting from a qualified disaster, including the COVID-19 pandemic.  Qualified disaster relief payments are excluded from a taxpayer’s gross income.

The rule contained in Section 214 would apply to businesses that are service recipients, and also to market platform operators with respect to COVID-19 assistance provided after March 12, 2020, and before January 1, 2021.  Under the Bill, a “market platform operator” means any person operating any digital website, mobile application, or similar system that facilitates the provision of goods or services by providers to recipients.

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Photo of S. Michael Chittenden S. Michael Chittenden

Michael Chittenden practices in the areas of tax and employee benefits with a focus on the Foreign Account Tax Compliance Act (FATCA), information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2, 1042, and 1042-S) and withholding, payroll taxes, and fringe benefits. Mr. Chittenden…

Michael Chittenden practices in the areas of tax and employee benefits with a focus on the Foreign Account Tax Compliance Act (FATCA), information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2, 1042, and 1042-S) and withholding, payroll taxes, and fringe benefits. Mr. Chittenden advises companies on their obligations under FATCA and assists in the development of comprehensive FATCA and Chapter 3 (nonresident alien reporting and withholding) compliance programs.

Mr. Chittenden advises large employers on their employment tax obligations, including the special FICA and FUTA rules for nonqualified deferred compensation, the successor employer rules, the voluntary correction of employment tax mistakes, and the abatement of late deposit and information reporting penalties. In addition, he has also advised large insurance companies and employers on the Affordable Care Act reporting requirements in Sections 6055 and 6056, and advised clients on the application of section 6050W (Form 1099-K reporting), including its application to third-party payment networks.

Mr. Chittenden counsels clients on mobile workforce issues including state income tax withholding for mobile employees and expatriate and inpatriate taxation and reporting.

Mr. Chittenden is a frequent commentator on information withholding, payroll taxes, and fringe benefits and regularly gives presentations on the compliance burdens for companies.