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Company Liable for Back Taxes and Penalties for Misclassifying Nurses as Contractors

(Parker Tax Publishing April 2022)

The Tax Court held that a corporation engaged in the business of providing at-home private duty nursing services to children with special needs misclassified as independent contractors the nurses it hired to perform such services and was thus liable for employment taxes on the nurses' wages as well as various penalties relating to the underpayment of taxes and tax deposits. In determining that the nurses were employees, the court cited several factors, including the degree of control exercised by the corporation, the lack of investments made by the workers in the business, and the fact that the corporation could fire a worker at will while the worker had to give two weeks' notice before leaving. Pediatric Impressions Home Health, Inc. v. Comm'r, T.C. Memo. 2022-35.


Pediatric Impressions Home Health, Inc. (Pediatric Impressions) was engaged in the business of providing at-home private duty nursing services to children with special needs (patients) during 2016 - 2018. Pediatric Impressions hired nurses to perform these services on its behalf. When a nurse applied to work for Pediatric Impressions, the company required the nurse to complete a written job application, pass a background check, and complete a nursing skills assessment it administered. Pediatric Impressions also verified the applicant's nursing credentials, ensured the applicant did not have any professional infractions, checked references, and confirmed that the individual was adequately trained.

All nurses signed a contract for services and Pediatric Impressions hired the nurses on a permanent basis for an indefinite period, and normally told the nurses that they were "employed" on a "full-time" basis. Pediatric Impressions had the sole authority to fire a nurse at will whereas a nurse could not end the working relationship without a minimum of two weeks' notice. Pediatric Impressions, not the nurses, received payment for the nursing services. The nurses had no contact with the patients' insurance companies, the state, or Medicaid. Pediatric Impressions represented to the patients and their legal guardians that the nurses worked for Pediatric Impressions. The nurses were supervised by Ify Agbo, Pediatric Impressions' administrator, president, and sole shareholder during 2016-2018, along with case managers employed by the company.

Insurance companies assigned a patient to Pediatric Impressions, who would then assign a nurse to that patient. Pediatric Impressions had sole authority to reassign a nurse to another patient. Pediatric Impressions set the nurses' work schedules and typically provided the nurses with full-time hours by assigning them multiple patients. The nurses could work for other nursing agencies while working for Pediatric Impressions but only during their off-hours. Pediatric Impressions paid the nurses an hourly rate based on timesheets they submitted and did not offer the nurses benefits such as health insurance, paid time off, or retirement benefits, but did occasionally pay incentive or performance bonuses. Pediatric Impressions also reimbursed the nurses for certain transportation costs, e.g., when a nurse had to escort a patient to the hospital or a patient needed a ride back to his or her residence. Although the nurses would sometimes use their own protective gloves, they were not expected to personally obtain any supplies or equipment needed for the performance of their duties. Pediatric Impressions also bought and maintained all necessary professional liability insurance policies and did not require the nurses to carry their own insurance policies.

Before 2016, Pediatric Impressions treated the nurses as employees for federal employment tax purposes. Starting in 2016, the company unilaterally began treating many of the nurses as independent contractors. The jobs performed and services provided by the nurses, including Pediatric Impressions' supervision thereof, however, remained the same following this change in employment status. Pediatric Impressions made no deposits of federal employment taxes into any federal depository for 2016-2018 with respect to the nurses.

Following an audit for years 2016-2018, the IRS issued Pediatric Impressions a notice of determination after concluding that: (1) Pediatric Impressions had not properly classified the nurses as independent contractors rather than employees during the periods at issue; (2) Pediatric Impressions was not entitled to Section 530 relief; and (3) Pediatric Impressions was liable for federal employment taxes, additions to tax under Code Sec. 6651 for underpayments of tax, and penalties under Code Sec. 6656 for underpayments of employment tax deposits with respect to the periods at issue.

Section 530 Relief

Section 530 relief was enacted in the Revenue Act of 1978. When applicable, Section 530 affords a taxpayer relief from federal employment taxes even if the relationship between the principal and the worker would otherwise require the payment of those taxes. To qualify for section 530 relief, certain requirements must be met. Under those requirements, a taxpayer: (1) must not have treated the worker as an employee for any period for purposes of federal employment taxes (the historic treatment requirement); (2) must have consistently filed all federal tax returns (including information returns) required to be filed by the taxpayer with respect to the individual for periods after 1978 on a basis consistent with the taxpayer's treatment of that individual as not being an employee (the reporting consistency requirement); (3) must have had a reasonable basis for not treating the worker as an employee, e.g., the taxpayer's treatment of the worker was in "reasonable reliance" of one of the items specified in section 530(a)(2) (the reasonable basis requirement); and (4) must not have treated as an employee any individual holding a position "substantially similar" to that of the worker in question (the substantive consistency requirement).


The Tax Court held that Pediatrics Impressions was liable for federal employment taxes with respect to payments made to its nurses for 2016 - 2018, as well as the additions to tax and penalties relating to the underpayments of employment taxes and employment tax deposits. The Tax Court noted that the Fifth Circuit, the court to which an appeal of this case would lie, considers five nonexhaustive factors for determining if an individual is an employee or an independent contractor: (1) the degree of control exercised by the alleged employer; (2) the degree to which the worker's opportunity for profit or loss is determined by the alleged employer; (3) the extent of the relative investments of the worker and the alleged employer; (4) the permanency of the relationship and the right to discharge a worker; and (5) the skill and initiative required in performing the job. No single factor, the court observed, is determinative; rather, each factor is a tool used to gauge the economic dependence of the alleged employee, and each must be applied with this ultimate concept in mind.

In concluding that Pediatrics Impressions was liable for employment taxes, the court made the following findings: (1) Pediatric Impressions acted as a gatekeeper between the nurses and the patients by subjecting the nurses to a thorough hiring and background review process, having the exclusive say as to which nurses worked with which patients, controlling the nurses working hours, and annually reassessing and evaluating the nurses; (2) Pediatrics Impressions received payment for the nursing services, the nurses did not share in Pediatrics Impressions' profits, the nurses only rarely received performance bonuses, and the nurses bore no risk of loss from the services they provided on behalf of the company; (3) the nurses had almost no capital investment in the job as Pediatrics Impressions was responsible for providing the supervision, training, and supplies needed for the nurses to perform their nursing services, and Pediatrics Impressions also reimbursed the nurses for out-of-pocket expenses such as transportation costs if they had to escort patients to and from their residences; (4) while Pediatrics Impressions and the nurses had the mutual ability to terminate their working relationship, only the nurses were required to provide two weeks' notice; and (5) while Pediatrics Impressions required each nurse to have certain nursing skills and knowledge, once a nurse was on the job a patient's plan of care specified how the nurse was to complete the assigned tasks and significant initiative on the part of the nurses was not necessary for them to receive consistent work.

With respect to the additions to tax and the penalties, the court found that Pediatric Impressions presented little evidence to support a finding of reasonable cause to abate either of those. The court noted that Pediatric Impressions' administrator, president, and sole shareholder, Ms. Agbo, testified that she decided to change the classification of its workers on the advice of the company's CPA, but she failed to offer any evidence to support this claim.

For a discussion of the misclassification employees for employment tax purposes, see Parker Tax ¶210,115.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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