The Gig Economy

Say that I retire. Perhaps my wife wins the lottery or marries well.

I get bored. Perhaps I would like a little running-around money. Maybe I flat-out need extra money.

I find a website that connects experienced tax practitioners to people needing tax services. There might be specializations available: as a practitioner I might accept corporate or passthrough work, for example, but not individual tax returns. I could work as much or as little as I want. I might work Friday and Saturday afternoons, for example, but not accept work on weekdays. I could turn down or fire clients. I could take time off without fear of dismissal.

There would have to be rules, of course. Life is a collection of rules. I might have to provide my state license to substantiate my credentials. I might have to post an E&O policy. It seems reasonable to expect the website to impose standards, such as for professional conduct, client communications, timeliness of service and so on

How would I get paid?

I am thinking that I would bill through the website. An advantage is that the website can devote more resources than I care to provide, making the arrangement a win-win-win for all parties involved. The website would collect from the client and then electronically deposit to my bank account.

Here is my question: is the website my employer?

Don’t scoff. We are talking the gig economy.

The issue has gained notoriety as states – New Jersey and California come to mind – have gone after companies like Uber and Lyft. From these states’ perspective, the issue is simple: if there is more than a de minimis interdependence between the service recipient and provider, then there must be an employment relationship between the two. Employment of course means FICA withholding, income tax withholding, unemployment insurance, disability insurance (in some cases), workers compensation and so on.

Let us be honest: employment status is Christmas day for some states. They would deem your garden statue an employee if they could wring a dollar out of you by doing so.

New Jersey recently hit Uber with a tax bill for $650 million, for example.

The employee-independent contractor issue is a BIG deal.

What in the world is the difference between an employee and an independent contractor?

People have been working on this question for a long time. The IRS has posited that employment means control – of the employer over the employee – and also that control travels on a spectrum. As one moves to the one end of the spectrum, it becomes increasingly likely that an employer-employee relationship exists.

The IRS looks at three broad categories:

(1)  Behavioral control

(2)  Financial control

(3)  Relationship of the parties

The IRS then looks at factors (sometimes called the 20 factors) through the lens of the above categories.

·        Can the service recipient tell you what, where, when and how to do something?

·        Is the service recipient the only recipient of the provider’s services?

·        Is the service relationship continuing?

Answer yes to those three factors and you sound a lot like an employee.

Problem is the easy issues exist only in a classroom or at seminar. In the real world, it is much more likely that you will find a mix of yes and no. In that event, how may “yes” answers will mean employee status? How many “no” answers will indicate contractor status?

Answer: no one knows.

Some states have taken a different approach, using what is called an “ABC” test. There was a significant case (Dynamex) in California. It interpreted the ABC test as follows:

(1)  The service provider is free from the direction and control of the service recipient in connection with the performance of the work.

(2)  The service provider performs work outside the usual course of the service recipient’s business.

(3)  The service provider is customarily engaged in the independent performance of the services provided.

I get the first one, but I point out that it is rarely all or nothing. If we here at CTG Command bring on a contractor CPA – say for the busy season or to collaborate on a tax area near the periphery of our experience – we would still have expectations. For example,

·        our office hours are XXX

·        reviewer turnaround times to tax preparers are XXX

·        responses to client calls are to occur with XXX hours or less

·        responses to me are to occur within X hours or less

·        drop-dead due dates are XXX

How many of these can we have before we fail the A in the ABC test?

Let’s look at B.

We are a CPA firm. Odds are we are interested in experienced CPAs. It is quite unlikely that we will have need of a master plumber or stonemason.

Have we automatically failed the B in the ABC test?

And what does C even mean?

I am a 30+ year tax CPA. I am a specialist and have been for many years. I would say that I am “customarily engaged” in tax practice. Do I have “independent performance,” however?

If I interpret this test to mean that I have more than one client, it somewhat makes sense, although there are still issues. For example, upon semi-retirement, I would like to be “of counsel” to a CPA firm. I have no intention of working every day, or of being there endless hours during the busy season. No, what I am thinking is that the firm would call me for specialized work – more complex tax issues, perhaps some tax representation. It would provide a mental challenge but not become a burden to me.

Would I do this for more than one firm?

Doubt it. I point to that “burden” thing.

Have I failed the C test?

I am still thinking through the issues involved in this area.

Including non-tax issues.

If I take an Uber and the driver gets into an accident – injuring me – do I have legal recourse to Uber? Seems to me that I should. Is this question affected by the employee-contractor issue? If it is, should it be?

This prompts me to think that the law is inadequate for a gig economy.

There is, for example, always some degree of control between the parties, if for no other reason than expectation is a variant of control. Not wanting to lose the gig is – at least to me – an incident of control to the service recipient. Talk to a CPA firm partner with an outsized client about expectation and control.

Why cannot CTG Command gig an experienced tax professional – say for a specific engagement or issue - without the presumption that we hired an employee? I can reasonably assure you that I will not be an employee when I go “of counsel.” You can forget my attending those Monday morning staff meetings.

Am I “independently performing” if I have but one client? What if it is a really good client? What if I don’t want a second client?

Problem is, we know there are toxic players out there who will abuse any wiggle room you give them. Still, that is no excuse for bad tax law. Not every person who works – let’s face it – is an employee. The gig economy has simply amplified that fact.

Benefitting Too Much From A Charity

I suspect that many of us know more about public charities and foundations than we cared to know a couple of years ago.

What sets up the temptation is that someone is not paying taxes, or paying extraordinarily low taxes. For example, obtain that coveted 501(c)(3) status and you will pay no taxes, barring extreme circumstances. If one cannot meet the "publicly supported" test of a (c)(3), the fallback is a private foundation - which only pays a 2% tax rate (and that can be reduced to 1%, with the right facts).

We should all be so lucky.

Let's discuss the issues of charities and private benefit and private inurement.

These rules exist because of the following language in Section 501(c):

No part of the earnings [of the exempt organization] inures to the benefit of any private shareholder or individual….”

In practice the Code distinguishes inurement depending upon who is being benefitted.

If that someone is an “insider,” then the issue is private inurement. An insider is someone who has enough influence or sway to affect the decision and actions of the organization.

A common enough example of private inurement is excessive compensation to a founder or officer.  The common safeguard is to empower an independent compensation committee, with authority to review and decide compensation packages. While not failsafe, it is a formidable defense.

If that someone is an “outsider,” then the term is private benefit.

Here is a question: say that someone sets up a foundation to assist with the expenses of breast cancer diagnosis and treatment. Several years later a family member is so diagnosed. Have we wandered into the realm of private inurement or benefit?

The Code will allow one to receive benefits from the charity – if that individual is also a member of a charitable class. In our example, that class is breast cancer patients. If one becomes a member of that class, one should sidestep the inurement or benefit issue.

The “should” is because the Code will not accept too small a charitable class. Say – for example - that the charitable class is restricted to the families of Cincinnati tax CPAs who went to school in Florida and Missouri, have in-laws overseas and who would entertain an offer to play in the NFL. While I have no problem with that charitable class, it is very unlikely the IRS would approve.

By the way, the cost of failing can be steep. There may be penalties on the charity and/or the insider. Push it too far and the organization's exempt status may be revoked altogether.

Or you may never be exempt to begin with. Let’s look at a recent IRS review of an application for exempt status.

A family member has a rare disease. You establish a foundation to "assist adolescent children and families in coping with undiagnosed and/or debilitating diseases."

The Code allows you to operate for a while and retroactively apply for exemption, which you do.

Sounds good so far.

You and your spouse are the incorporators.

This is common. You can still establish an independent Board.

Your organizing paperwork does not have a "dissolution" clause.

Big oversight. The dissolution clause means that - upon dissolution - all remaining assets go to another charity. To say it differently, remaining assets cannot return to you or your spouse.

The charity is named after your son, who suffers from an unidentified illness.

Not an issue. I suspect many foundations begin this way.

Your fundraising materials specifically request donations to help your son.

You are stepping a bit close to the third rail with this one.

Since inception, the only individual to receive funds is your son. Granted, you have said you intend to make future distributions to other individuals and unrelated nonprofits with a similar mission statement. Those individuals and organizations will have to apply, and a committee will review their application. It just hasn’t happened yet.

Problem.

The IRS looked at your application for exemption and bounced it. There were two main reasons:

First, the problem with the paperwork, specifically the dissolution clause. The IRS would likely have allowed you the opportunity to correct this matter, except that ...

Secondly, there were operational issues. It does not matter how flowery that mission statement is. The IRS reserves the right to look at what you are actually doing, and in this case what you were actually doing was making your son's medical expenses tax-deductible by introducing a (c)(3). Granted, there was language allowing for other children and other organizations, but the reality is that your son was the only beneficiary of the charity's largesse. The rest was just words.

The IRS denied the request. All the benefits of the organization went to your family, and the promise of future beneficiaries was too dim and distant to sway the answer. You had too small a charitable class (that is, a class of one), and that constitutes private inurement.

And you still have a tax problem. You have an entity that has collected money and made disbursements. The intent was for it to be a charity, but that intent was dashed. The entity has to file a tax return, but it will have to file as a taxpaying entity.

Are the monies received taxable income? Are the medical expenses even deductible? You have a mess.

The upside is that you would only be filing tax returns for a year or two, as you would shut down the entity immediately.