Employee Wages vs Compensation Paid to an Independent Contractor, Finding and Analyzing the Relevant Code Sections and Regulations and a Relevant Case

Facts: Your client, Vacation Property Management (VPM), is a property management company which manages vacation cabins in a small town in Colorado. VPM manages 50 properties all located within a 20-mile radius in a vacation town around a popular lake. Currently, they outsource property cleaning to a small cleaning company, Awesome Cleaners, LLC, which is located near the vacation town. VPM prides themselves on five-star cleaning and to maintain their reputation they have decided to implement a new cleaning protocol with detailed cleaning guides and quality review. The current cleaners, Awesome Cleaners, LLC, has indicated they are unwilling to implement the new cleaning guidelines which has led VPM to a decision to hire their own cleaners.

VPM advertised locally and found nine individuals with cleaning experience sufficient to meet VPMs standards. Each cleaner will be given a list of tasks for each property which includes cleaning instructions and inventory for that property. Each property has a VPM owned closet with supplies and tools for cleaning. VPM specifies the brand of cleaners used so that hygiene standards can be met and keep them available in the closets. Since the cleaners use the products to complete their assignment, 10% of their payment is withheld for supply costs.

Each Sunday, VPM sends each cleaner a schedule for cleaning for the week. Cleaners work alone or in groups assigned by VPM and must clean according to the schedule due to renters checking in and out throughout the week. At the end of the week, each cleaner sends VPM a message with the cleans they completed throughout the week.

VPM makes no guarantees of how many properties each cleaner is assigned per week. VPM pays the cleaners by property and allocates that by the number of cleaners assigned to the property. Because this work is seasonal, many of the cleaners have other work in the town such as cleaning houses for residential owners, cleaning business offices and working evenings in local restaurants and bars. VPM and the cleaners sign an agreement with VPM that they will perform services as described in the contract or as agreed upon by both parties.

VPMs owner has asked you for guidance regarding whether the cleaners will be considered employees by VPM and whether the money paid to the cleaners will be wages for federal employment tax purposes.

First step: Identify and properly cite the Code sections and regulations that define the terms wages and employee for employment tax (i.e., withholding, FICA and FUTA) purposes. Review the definitions. Do they resolve VPMs issue? Why or why not? (I cannot find the code for Independent contractor)

Second step: Find and review a relevant court decision that involves VPMs issue and similar facts. Provide a proper citation for the case. Briefly describe the facts of the case and the courts reasoning and conclusion(s). Indicate whether you think the court would reach the same conclusion in VPMs situation and why or why not.

Third step: Write an external tax research memo to VPM with a recommendation.

Fourth step: Write an internal tax research memo for the clients file. (Need to understand the difference between step 3 and 4)

Fifth step: Write a short explanation to be provided to the cleaners explaining to them what their employment status is in relation to VPM and why. For example, if they are an employee, what tax they will pay or if they are an independent contractor, what taxes they will pay.