Corporation liable for payroll taxes on wages IRS determined it should have paid to officers
Hacker, TC Memo 2021-86
The Tax Court has held that two corporate officers were employees of a corporation they owned and that the corporation was liable for its share of payroll taxes on the IRS's reasonable determination of what the corporation should have been paying the officers. And the corporation could not offset that reasonable determination with wages that another corporation (also owned solely by the officers) paid to the officers as employees of that other corporation.
Background. For purposes of the Code Sec. 3101 and Code Sec. 3111 Federal Insurance Contribution Act (FICA) taxes and the Code Sec. 3301 Federal Unemployment Tax Act (FUTA) taxes (collectively commonly referred to as payroll taxes), an "employee" is defined to include "any officer of a corporation." (Code Sec. 3121(d)(1), Code Sec. 3121(d)(2), Code Sec. 3306(i))
In addition, an officer of a corporation who performs more than minor services and receives remuneration for such services is an employee for employment tax purposes. (Joseph M. Grey Pub. Accountant, P.C., (2002) 119 TC 121)
Facts. Mr. and Ms. Hacker were 49% and 51% owners of Blossom, Inc. (Blossom or Blossom Day Care Centers), which operated day care centers. They were also Blossom's only corporate officers.
Mrs. Hacker served not only as Blossom's president but also as "the director of curriculum and education for the 90 employees, students, and six locations for Blossom." She served as Blossom's top manager, personally overseeing and supervising employees, including hiring and firing, and managing Blossom's six day care directors, with all of petitioner's employees ultimately reporting to her."
Mr. Hacker served not only as Blossom's corporate vice president but also as its secretary and treasurer. During the years at issue, Mr. Hacker also served as the director of the Blossom Day Care Centers and as director of accountability and finance for Blossom. Mr. Hacker had authority over all of Blossom's bank accounts, and his daily responsibilities included, but were not limited to, depositing parents' payments for childcare into Blossom's bank accounts and personally writing all of the payroll checks to Blossom's 90 employees.
In addition, the Hackers, as sole shareholders, incorporated Hacker Corp. Blossom had conveyed to Hacker Corp. certain real estate locations of Blossom Day Care Centers. Hacker Corp. provided property and services management to Blossom, its only client. Hacker Corp. paid salaries to the Hackers in 2005 totaling $73,848 for services provided to Hacker Corp., which were arguably for management of Blossom.
Blossom paid no salary or wages to the Hackers.
The IRS contended that the Hackers were employees of Blossom; that the Hackers had additional wage income (reasonable wage determination) from Blossom in 2005 of $209,200; and that Blossom was therefore liable for its share of payroll taxes on that reasonable wage determination.
Decision. Employees. First, the Tax Court agreed with the IRS that the Hackers were employees of Blossom. It noted that the Code provides, for payroll tax purposes, for corporate officers to also be employees. And, citing Joseph M. Grey Pub. Accountant, the Court found that the Hackers performed more than minor services to Blossom.
Compensation. Blossom had argued before the Tax Court hearing that if the Hackers were to be found to be employees, then Blossom should owe payroll taxes on no more than the difference between what was paid to them as employees of Hacker Corp. and the reasonable wage determination. That is, instead of $209,200, Blossom should be responsible for payroll taxes on only the difference between $209,200 and $73,848.
The Court said that Blossom's arguments were misguided in that wages paid by Hacker Corp. did not offset reasonable compensation requirements for the services provided by the Hackers to Blossom.
References: For corporate officers and directors as employees for payroll tax purposes., see FTC2d/FIN ¶H-4557.