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Independent contractor status remains a hot issue for
freelance reporters. If you don’t know and follow the
requirements, an unpleasant experience with the IRS may
result.
Almost 90 percent of NCRA’s freelance reporter
members are independent contractors. Having such a
large segment of the industry with that designation automatically puts the profession on the Internal Revenue Service’s radar screen. When investigating a court
reporting firm, the IRS is usually trying to answer one
question: Are your independent contractors really independent contractors?
Those firm owners who treat their reporters as employees often cite this as a primary reason why they
moved away from independent contractor status — to
avoid the scrutiny of the IRS. But there are other reasons for doing so. Jason Meadors, RPR, of Fort
Collins, Colo., chose this status for three reasons.
“Consistency, reliability and control,” he says. “With
an employee, I can simply direct her to take a job as
opposed to calling around and hoping that someone in
the first tier of our ‘subs’ is available. I take the title of
‘independent contractor’ very seriously. I can only direct their activities along fairly narrow guidelines.
With an employee, I can be sure that the work product
is consistent with the firm guidelines in appearance,
content and format.” Of course, there are additional
recordkeeping and withholding requirements. And
employees may have the option of health and dental
insurance, retirement programs and other benefits.
Working as a freelance reporter also offers distinct
advantages and disadvantages. “I love the independence and freedom of being my own boss,” says Debra
Codiga of Sacramento, Calif. “I joke about being permanently unemployable because I’m spoiled after all
these years of calling my own shots.” Some additional
benefits are getting a larger percentage of the per-page
rate, more deductions for tax purposes, working with
other firms if it gets slow, and potentially making
larger investments in retirement programs for people
who are self-employed than allowed with employee
retirement programs. And the challenges? Paying for
health insurance, reporting-related expenses and making estimated tax and Social Security payments.
Obviously, how a freelance reporting firm chooses
to treat its reporters is an individual decision. The
most important aspect of this process is to ensure that
independent contractors are actually being treated as
independent contractors and that employees are being
treated as employees. Otherwise, scrutiny from the
IRS could lead to some unpleasant circumstances.
Making a Judgment
How does the IRS examine the legitimacy of independent contractor status? IRS Publication 15A, Employer’s Supplemental Tax Guide, states that “public
stenographers” are generally not employees. Still, determining whether a court reporter is an employee or
independent contractor depends on the facts of each
individual case.
Generally, a court reporter is considered an independent contractor if the payer has the right to control
or direct only the result of the work and not the means
or methods of accomplishing the result. (Under the
common-law rules followed by the IRS, anyone who
About the Author
Pete Wacht is Editor of the JCR.
JOURNAL OF COURT REPORTING / APRIL 2001
59
performs services for you is your employee if you can control what will be
done and how it will be done.) It
doesn’t matter how the relationship is
labeled, even if it’s set out in an independent contractor agreement. (See
the sidebar on page 64.) The substance
of the relationship, not the label, governs the worker’s status. The factors
that will determine the degree of control and independence fall into three
categories:
Behavioral control. Facts that
show whether the business has a right
to direct and control how the worker
does the task for which the worker is
hired include the type and degree of:
• Instructions the business gives the
worker. An employee is generally subject to the business’s instructions
about when, where and how to work.
• Training the business gives the
worker. An employee may be trained to
perform services in a particular manner. Independent contractors ordinarily use their own methods.
Financial control. Facts that
show whether the business has a right
to control the business aspects of the
worker’s job include:
• The extent to which the worker has
unreimbursed expenses. Independent
contractors are more likely to have unreimbursed expenses than employees.
Fixed ongoing costs that are incurred
regardless of whether work is currently being performed are especially
important.
• The extent of the worker’s investment. An independent contractor often
has a significant investment in the facilities he or she uses in performing
services for someone else. For the
court reporter, that would include his
or her steno machine, CAT/realtime
software and other necessary equipment.
• The extent to which the worker makes
services available to the relevant market. If
a reporter only works for one freelance agency, and will not accept work
from any other firm, then that reporter
may be considered an employee.
• How the business pays the worker.
An independent contractor is usually
60
JOURNAL OF COURT REPORTING / APRIL 2001
paid by the job, as is the case for most
freelance reporters.
• The extent to which the worker can
realize a profit or incur a loss. An independent contractor can make a profit or loss.
Type of relationship. Facts that
show the parties’ type of relationship
include:
• Written contracts describing the relationship the parties intended to create. This
one factor demonstrates why it’s critical for freelance agencies and reporters
to base their relationship on a written
independent contractor agreement.
• Whether the business provides the
worker with employee-type benefits, such as
insurance, a pension plan or vacation and
sick pay.
• The permanency of the relationship.
If you engage a worker with the expectation that the relationship will
continue indefinitely, rather than for a
specific project or period, this is generally considered evidence that your
intent was to create an employeremployee relationship.
• The extent to which services performed by the worker are a key aspect of the
regular business of the company. If the
worker provides services that are a key
aspect of your regular business activity,
it is more likely that you will have the
right to direct and control his or her
activities.
The IRS often uses a 20-factor test
(see the sidebar on page 61) as an analytical tool to make an initial determination of the working relationship.
However, as tax attorney James
Urquhart points out in his book The
IRS, Independent Contractors and You,
there are more than 50 other common-law factors that can go into this
determination. For example, some additional considerations that suggest independent contractor status include
demonstrating that:
• You are engaged in a distinct
trade, occupation, profession or business (which can be accomplished with
letterhead and business cards);
• You have the required licenses,
permits or certificates to do business;
• You do business as a corporation;
• You hire help to complete your
work, such as a scopist;
• You supply all the tools necessary
to work as a court reporter; and
• You have many sources of income.
Some of the additional factors that
suggest employee status include having noncompetition clauses in your
working agreements or you receive
free training from a freelance agency.
Protections Available
Nevertheless, Section 530 of the
tax code, as amended by the Small
Business Job Protection Act of 1996,
does offer some relief from federal
employment taxes if certain requirements are met. In a November 1999
IRS memorandum, “Chief Counsel
Advice for Worker Classification,”
it was pointed out that “the first step
in any case involving whether a
business is liable for employment
taxes on the compensation paid to particular workers is to determine
whether the business meets the
requirements for section 530 relief. If
so, the business will not be liable for
employment taxes on the compensation paid to the workers, even if they
are its employees under the common
law standard.”
IRS Publication 1976 states that to
receive relief under the section 530
safe-harbor provision, you must meet
the following three requirements:
Reasonable basis. To establish
that you had a reasonable basis for not
treating workers as employees, you
can show that:
• You reasonably relied on a court
case about federal taxes or a ruling issued by the IRS, or
• Your business was audited by the
IRS at a time when you treated similar
workers as independent contractors,
and the IRS did not reclassify those
workers as employees, or
• You treated the workers as independent contractors because you knew
that was the long-standing practice of
how a significant segment of your industry treated similar workers, or
• You relied on some other reasonable basis. For example, you relied on
the advice of a business lawyer or ac-
Do You Know the Difference Between an
Independent Contractor and an Employee?
To help determine whether sufficient control is present to establish
an employer-employee relationship, here is the 20-question checklist
commonly used by the IRS as an analytical tool. Answering “yes” represents a common aspect of the employer-employee relationship. Answering “no” represents a common factor when dealing with an independent
contractor.
Not every factor applies to every situation, and the degree of importance of each factor varies depending on the type of work and individual
circumstances.
❏ Yes ❏ No
1. Does the worker have to comply with instructions
about when, where and how the work results are
achieved?
❏ Yes ❏ No
2. Has the employer trained the worker to perform
services in a particular manner?
❏ Yes ❏ No
3. Has the employer integrated the worker’s
services into the business operations because they
contribute to the success or continuation of the
business?
❏ Yes ❏ No
4. Does the worker render few if any services personally?
❏ Yes ❏ No
5. Does the worker have authority to hire, supervise
and pay assistants?
❏ Yes ❏ No
6. Does the employee have a continuing relationship
with an employer?
❏ Yes ❏ No
7. Does the worker have set hours of work established by the employer?
❏ Yes ❏ No
8. Does the employee have to work or be available
full time?
❏ Yes ❏ No
9. Does the worker work on the premises of an
employer, or work on a route or at a location
designated by an employer?
❏ Yes ❏ No 10. Does the worker have to perform services in the
order or sequence set by an employer?
❏ Yes ❏ No 11. Does the worker have to submit reports to an
employer?
❏ Yes ❏ No 12. Is the worker paid by the hour, week or month?
❏ Yes ❏ No 13. Does the employer pay for the worker’s business
and travel expenses?
❏ Yes ❏ No 14. Does the employer furnish the worker with
significant tools, materials and other equipment?
❏ Yes ❏ No 15. Does the worker have little or no investment in
the facilities he or she uses in providing services
for someone else?
❏ Yes ❏ No 16. Does the worker have no stake in the profit or loss
of an employer?
❏ Yes ❏ No 17. Does the worker work for only one person or
firm?
❏ Yes ❏ No 18. Does the worker only make his or her services
available to one employer?
❏ Yes ❏ No 19. Can the employer fire the worker?
❏ Yes ❏ No 20. Can the worker quit his or her job at any time
without incurring liability?
countant who knew the facts about
your industry.
“Long-standing” is defined by the
IRS as a practice that has existed for 10
or more years. When defining “significant segment” in the past, there was
no set standard. However, that
changed with the 1996 Small Business
Job Protection Act. The firm now only
has to demonstrate that 25 percent of
the industry uses independent contractors. Based on NCR A’s latest
membership survey, 87 percent of
freelance reporters are independent
contractors, and only 13 percent are
treated as employees.
The Conference Agreement on
section 530 of the 1978 Revenue Act
explains Congress’s intention with respect to the reasonable basis guideline:
“Generally, the bill grants relief if a
taxpayer had any reasonable basis for
treating workers as other than employees. The committee intends that this
reasonable basis requirement be construed liberally in favor of taxpayers.”
Substantive consistency. You
must have treated the workers, and
any similar workers, as independent
contractors.
Reporting consistency. You
must have filed Form 1099-MISC for
each worker, unless the worker earned
less than $600. A key point to remember is that this requirement applies
only to the period under investigation.
The IRS will determine whether
the workers are independent contractors or employees if you do not meet
these relief requirements. If the IRS
decides that the reporters are actually
employees, then the firm may be held
liable for employment taxes for those
workers.
Why is the section 530 safe haven
such a potentially useful tool? Because
in most general tax cases, the taxpayer
is required to demonstrate innocence.
Before the Small Business Job Protection Act, a reporting firm had to show
that it had a reasonable basis for treating reporters as independent contractors. Now, if you can establish a prima
facie case that it was reasonable not to
Continued on page 64
JOURNAL OF COURT REPORTING / APRIL 2001
61
Independent Contractor Agreements
The primary purpose of a written contract between a reporter and an agency is to define the relationship
between the two so that the parties know where they stand. This also proves critical from the standpoint of
having to deal with the Internal Revenue Service if there is a dispute as to whether the reporters working for a
freelance agency should be classified as independent contractors or employees.
The March 1998 JCR article “What Independent Contractor Agreements Should Cover” touched on several common contract clauses. Following are those that have clear applicability to this issue. Keep in mind,
however, that the IRS training document “Independent Contractor or Employee?” states, “A contractual designation, in and of itself, is not sufficient evidence for determining worker status. The facts and circumstances
under which a worker performs services are determinative of the worker’s status.”
Working relationship. One of the primary purposes of the contract is to clarify that this is in fact an
independent contractor relationship. For example,
the agency will not provide office space, equipment
or supplies; withhold taxes; or in specific ways direct
or supervise the reporter’s work.
Work volume/method. The reporter has the discretion to produce a transcript where and when he or
she chooses. Conversely, the agency does not guarantee the reporter a certain amount of work each week
or month.
Freedom to refuse. As an independent contractor, the reporter can turn down work requested by
the agency.
Noncompetition. If a reporter works strictly for
one firm, and the contract says the reporter must give
preference to the firm, the IRS may question the individual’s status as an independent contractor.
treat the individual as an employee
and you cooperate fully with reasonable requests from the examiner, the
burden of proof is shifted to the IRS.
What About Officials?
How do the independent contractor regulations affect official reporters?
Almost all official reporters are employees of the courts, which means
they are eligible for all the benefits offered by the court system or government and they have taxes withheld.
The independent contractor regulations apply with respect to transcript
income. In Lisanti, et al. v. Administrative Office of the U.S. Courts, et al., the
Seventh Circuit Court of Appeals rec64
JOURNAL OF COURT REPORTING / APRIL 2001
Equipment/transportation. Independent contractors are usually responsible for furnishing their
own equipment and transportation.
Business expenses. Except for a few small items
such as transcript covers, independent contractors
usually pay for their own supplies and equipment and
other expenses. This would include hiring scopists or
proofreaders.
Taxes. The contract should note if, as is likely, the
contractor is responsible for all taxes, and that the
firm will not withhold any taxes or other fees from
the reporter’s compensation.
Liability. Who is liable for the services performed? If it’s a true independent contractor relationship, probably the reporter.
Contract termination. Making this an at-will
decision makes it appear to be an employee relationship. Termination should be allowed for cause with a
written notice requirement.
ognized the two types of income official reporters receive: “They are paid
an annual salary which is set ‘from
time to time by the Judicial Conference of the United States’ ... and they
also ‘may charge and collect fees for
transcripts requested by the parties ...
at rates prescribed by the court subject
to the approval of the Judicial Conference.’” The court stated quite clearly
that “The government considers court
reporters to be independent contractors, as opposed to employees, while
they are preparing transcripts.”
This was confirmed in a January
1999 Private Letter Ruling by the IRS
regarding a district court reporter and
the worker’s federal employment tax
status with respect to the services performed in selling transcripts. And, in
fact, the basis for the ruling goes all
the way back to a 1958 ruling on the
same issue, which concluded “that
fees received by federal court reporters
from the preparation and sale of official transcripts represent income from
a trade or business, such activity being
aside from their basic duties for which
they receive a statutory wage. Such additional income is includible in computing net earnings from selfemployment for purposes of the tax
on self-employment.” Therefore, “the
worker is not the firm’s [court’s] employee with respect to the services he
performs in selling transcripts.” ■