Independent contractor status takes on new meaning for entertainment companies.

• Author: Rauch, Karen G.

In recent years, many industries have faced an increased number of IRS audits and inquiries with respect to workers classified as independent contractors rather than employees. The Service's commitment and expansion of enforcement efforts in this regard is largely due to IRS estimates that employee misclassification costs more than $1 billion annually in lost revenues relating to income, Social Security and unemployment taxes. Those employers that misclassify workers as independent contractors when they are in reality employees may be liable for all FICA, FUTA and income tax that should have been withheld and/or paid by the employer, as well as any resulting interest and penalties.

The entertainment industry (including corporate production units), which typically has independent contractor relationships with consultants (such as directors, producers, script supervisors and camera operators), has become a priority target of the Service's push. In fact, as part of its Market Segment Specialization Program, the IRS recently issued internal guidelines on the classification of workers in the Television Commercial Production and Professional Video Communication industries (the Industry) so that examiners may characterize workers within the entertainment and sports market segment.

The common law test

In general, to determine whether a worker is an employee or an independent contractor, an employer must first consider if the worker falls under Secs. 3121(d) and 3401(c). If the worker is not included within the statutory definition (e.g., officer of a corporation, agent-driver, life insurance salesperson), the employer must assess the worker's status by applying the common law standard of control. Under this test, a worker is an employee if the employer has the right to direct and control a worker as to the details of when, where and how the work is performed. It should be noted that it is not necessary for the business to actually direct/control the manner in which services are performed; it is sufficient that the employer has the right to do so. However, if the business merely specifies the result to be achieved and does not direct the details of the work, the worker will be classified as an independent contractor. The Service considers 20 factors set out in Rev. Rul. 87-41 relevant in such a determination. In practice, determining the proper worker status through application of these factors requires many subjective judgments.

Classification...