There is a tax provision in the latest Obama plan I missed until I waded this morning into the details released by the Office of Management and Budget. It is entitled:
Increase certainty with respect to worker classification.
I love those guys who think of these things. It could have been titled, how to squeeze more money out of people or perhaps, let’s give another sop to Big Labor. (If Oil can be BIG, so can Labor) In any event, it is a serious issue but all kinds of independent contractors-which includes a wide range of jobs- should be wary.
By way of background, a worker is classified as an employee or as a self-employed (independent contractor) based on a common law test developed over the years for determining whether an employment relationship exists. It is not always clear one way or the other, as there are a number of factors involved including:
- The amount of control exercised by the company;
- Payment for the work facilities;
- Is there a chance the worker will have a profit or loss;
- Are any benefits provided:
- Is the work integral to the regular business;
- Can the worker be terminated;
- What relationship do the parties think is present.
The main issue concerning the classification is that companies having independent contractors to do work, as opposed to employees, do not have to pay Social Security taxes, Medicare taxes and unemployment insurance taxes for those workers. There are other “benefits" to the employer as well, like overtime pay and other mandated benefits. See any theme here? Companies do not withhold income taxes from contractors’ payments, and there in creates the problem for governments. The Federal Government believes a significant portion of independent contractors do not report their true income, in spite of the elaborate reporting system present through Form 1099.
Under a special provision (section 530 of the Revenue Act of 1978 which I actually worked as a staffer in the US Senate), a business may treat a worker who may actually be a employee as an independent contractor for Federal employment tax purposes if, among other things, the business has a reasonable basis for treating the worker as an independent contractor. If the business meets the requirements of this provision with respect to a class of workers, the IRS is prohibited from reclassifying the workers as employees, even prospectively. This safe harbor provision was enacted because many businesses were being harassed retroactively by the IRS, long-standing business arrangements with workers were being challenged and to provide some uncertainly in this area. This included real estate agents, direct sellers-like the Avon Lady-and countless other occupations.
With the States and the Feds desperate for revenue and, of course, independent contractors’ difficult to unionize (to pay union dues), the Administration has suggested some changes to permit the IRS to require prospective reclassification of workers who are currently misclassified, in their opinion. The Administration has made similar proposals like this in at least one past budget as I recollect so like most of the tax proposals from the Administration, it is not completely new
It is a bit more complicated than all of this. It always is. Doubtlessly, there are businesses, which deliberately violate the spirit if not the letter of the law. There are surely independent contractors as well as employees who do not report all their income. However, given the Government’s motives, incentives and the ability to cause mischief for all to get the very few, this one bears watching.