Question

Nu-Look Design, Inc., operated as a residential home improvement company. During calendar years 1996, 1997, and 1998, Ronald A. Stark not only was Nu-Look’s sole shareholder and president but also managed the company. He solicited business, per-formed necessary bookkeeping, otherwise handled finances, and hired and supervised workers. Rather than pay Stark a salary or wages, Nu-Look distributed its net income during 1996, 1997, and 1998 to him “as Mr. Stark’s needs arose.” Nu-Look reported on its tax returns in 1996, 1997, and 1998 net incomes of $10,866.14, $14,216.37, and $7,103.60, respec-tively. Stark, in turn, reported the very same amounts as nonpassive income on his 1996, 1997, and 1998 tax returns. On June 8, 2001, the IRS issued to Nu-Look a “Notice of Determination Concerning Worker Classification.” The notice advised that the IRS had classified an individual at Nu-Look as an employee for purposes of federal employment taxes and that such taxes could be assessed for calendar years 1996, 1997, and 1998. Nu-Look challenged this determination by filing a petition for redetermination in the United States Tax Court, disputing the propri-ety of the determination that Stark was an employee, and sought relief from that determination. The tax court found that Stark performed more than minor services for Nu-Look and had received remunera-tion for those services. As a result, the court held that Stark was an employee of Nu-Look and that Nu-Look was not entitled to relief. Nu-Look appealed. Does Stark meet the requirements for an employee? Should Nu-Look be liable for a tax assessed under the assumption that Stark is an employee? [ Nu-Look Design, Inc. v. Commission of Internal Revenue, 356 F.3d 290 (2004).]

Answer 1

Answer= For an individual to be termed an employee of the organization the following factors must be satisfied=

The nature of the work and the manner in which work has to be performed has to be governed by the organization

The working time, equipment or tools must be governed by the organization

The compensation will be paid regularly

If we look at the above factors, it is clear that Stark is an employee of Nu-Look as he performs many services for the organization and he was also doing the different activities related to the business management, thus he will be categorized as an employee.

Yes, as Stark is the employee of Nu-Look so the company must be liable for a tax assessed under the assumption that Stark is an employee. The company has to pay all of the tax related to the compensation or money paid to Stark as per the prevailing tax laws.