Internal Revenue Service
Revenue Ruling
TaxLinks.com
smRev. Rul. 72-88
1972-1 C.B. 319
IRS Headnote
A tailor performing the unsupervised manufacture of garments in his home for "merchant tailors" is a "home worker" employee for purposes of FICA but not for purposes of FUTA or withholding of income tax; S.S.T. 391 and Mim. 5763 revoked.
Full Text
Rev. Rul. 72-88
Advice has been requested whether, under the circumstances described below, A, an individual, is an employee of certain "merchant tailors" (wholesalers and retailers of clothing) for whom he performs services for purposes of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages (chapters 21, 23, and 24, respectively, subtitle C, Internal Revenue Code of 1954).
A visits the premises of certain "merchant tailors" for the purpose of securing orders for the manufacture of completed garments. When a "merchant tailor" has work for him to do, he is given the necessary material and an order for the garments, setting forth the price to be paid and the specifications of the garment. A returns to his home where he completes the garments. Upon delivery of the completed articles to the "merchant tailor", A is paid a fixed price per piece if the garments do not vary from the specifications in any major respect. Minor changes are made by the "merchant tailor" in his own shop. The "merchant tailor" furnishes the material for any major alterations that are made by A. A's equipment in his home consists of a sewing machine, an electric iron, shears, needles, etc. At times, when the amount of work justifies such action, he engages a member of his family to assist him. A does not maintain an equipped shop which is open to the general public.
A is not required to keep regular hours, no records are kept by the "merchant tailors" as to his time on a particular job, and he does not receive direct supervision from them.
An individual is an employee for Federal employment tax purposes if he has the status of employee under the usual common law rules applicable in determining the employer-employee relationship. Guides for determining that status are found in three substantially similar sections of the Employment Tax Regulations: namely, sections 31.3121(d)-1, 31.3306(i)-1, and 31.3401(c)-1. Generally the relationship of employer and employee exists when the person for whom the services are performed has the right to control and direct the individual who performs the services not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. The facts in the instant case show that the "merchant tailors" do not exercise, or have the right to exercise, over A the degree of direction and control necessary to establish an employer-employee relationship under the usual common law rules. Accordingly, A is not an employee of the "merchant tailors" under those rules and liability under the Federal Unemployment Tax Act and for the Collection of Income Tax at Source on Wages is not incurred with respect to amount paid for his services.
However, section 3121(d)(3)(C) of the Federal Insurance Contributions Act provides, in part, that the term "employee", for purposes of the Act, means any individual (other than an individual who is an employee under paragraph (1) or (2) of section 3121(d) who performs services for remuneration for any person--
* * * as a home worker performing work, according to specifications furnished by the persons for whom the services are performed, on materials or goods furnished by such person which are required to be returned to such person or a person designated by him; * * *
* * * * *
if the contract of service contemplates that substantially all of such services are to be performed personally by such individual; except that an individual shall not be included in the term 'employee' under the provisions of this paragraph if such individual has a substantial investment in facilities used in connection with the performance of such services (other than in facilities for transportation, or if the services are in the nature of a single transaction not part of a continuing relationship with the person for whom the services are performed.
The facts in the instant case show that A performs the services in his home using material furnished by the "merchant tailors", in accordance with their specifications. The completed work is returned to the "merchant tailors". Therefore, the only questions to be resolved in determining whether A is an employee under section 3121(d)(3)(C) of the Federal Insurance Contributions Act are (1) whether substantially all the services are to be performed personally by A, (2) whether he has a substantial investment in the facilities used, and (3) whether under the circumstances the services are performed as a part of a continuing relationship.
The answer to the question as to whether it is contemplated that substantially all the services are to be performed personally by the individual must be determined upon the basis of all the facts and circumstances presented. The term "contract of service" as used in the Act means an arrangement, formal or informal, under which the particular services are performed. The requirement that the contract of service contemplates that substantially all the services to which the contract relates in the particular designated occupation are to be performed personally by the individual means that no material part of the services to which the contract relates in such occupation will be delegated to any other person by the individual who undertakes under the contract to perform such services. The facts in the case indicate that the arrangements contemplate that A is to perform the work personally even though members of his family may occasionally assist in the work.
The second question is whether A has a substantial investment in facilities used in connection with the work. If an individual has a substantial investment in facilities of the requisite character, he is not an employee within the meaning of section 3121(d)(3)(C) of the Act, since a substantial investment of the requisite character standing alone is sufficient to exclude the individual from the concept of a statutory employee. Such facilities include equipment and premises available for the work or enterprise as distinguished from education, training, and experience, but do not include such tools, instruments, equipment, or clothing, as are commonly or frequently provided by employees. A home worker must, of necessity, always provide the space in a personal residence, as well as heat, light and power, required for the performance of the services and therefore, these items are not includible in determining "investment". See Revenue Ruling 64-280, C.B. 1964-2, 384. It is also stated in Revenue Ruling 64-280, that the furnishing of a typewriter and related supplies, by the home worker, standing alone does not constitute a substantial investment in facilities used in the work since a typewriter may be used for purposes not related to the particular services.
Similarly, a sewing machine, iron, shears, etc. may be used for purposes not related to the particular services. Thus, it is concluded in the instant case that A does not have a substantial investment in facilities.
With respect to question three, the fact that assignments of work are made on an intermittent basis and that each may be a separate assignment of work is not controlling in determining whether a continuing relationship exists between the home worker and the person for whom the services are being performed. Although the services in the instant case may not be performed on consecutive workdays this factor does not indicate that they are not performed as a part of a continuing relationship.
Accordingly, based on all the facts stated, it is held that A is a home worker employee of the "merchant tailors" under section 3121(d)(3) of the Federal Insurance Contributions Act for purposes of the taxes imposed by that Act. However, section 3121(a)(10) of the Act excludes from "wages" subject to the tax remuneration paid by an employer in any calendar quarter to a home worker employee, if the cash remuneration paid in such quarter by the employer to the employee for such service is less than $50.
S.S.T. 391, C.B. 1940-1, 196 and Mim. 5763, C.B. 1944, 556 are revoked.