The Obama Administration’s 2011 Budget for the Department of Labor includes an additional $25 million to target the misclassification of workers as independent contractors. This will fund an additional 100 enforcement personnel and some state grants to fund enforcement actions.
The Obama Administration hopes that the increased enforcement efforts will result in an additional $7 billion in recovered taxes over the next 10 years.
The real issue stems from the recurrent problem of independent contractors either failing to report properly all of their income or overstating their expenses.
Increased attention on worker misclassification can also affect other areas, such as wage and hour classification issues.
Under Section 530 of the Revenue Act of 1978, employers generally can continue classifying individuals as independent contractors even if that classification is not correct if the employer
- consistently treated the workers as independent contractors
- properly reported income on federal tax forms, and
- had a reasonable basis for classifying the workers as independent contractors.
However, the current administration is proposing to:
- Repeal the Section 530 relief.
- Repeal the Revenue Act of 1978 provisions that restrict the IRS from issuing new guidance on worker classification.
- Limit reduced retroactive tax rates under Code §3509 to those employers who voluntarily reclassify workers and not to audit situations.
- Require businesses to notify independent contractors of their status and explain the tax, compensation and wage and hour implications of this classification.
- Allow independent contractors receiving at least $600 in payments to require withholding at a flat rate selected by the contractor.
Various states have also entered the fray.
- In 2004, Massachusetts amended laws to provide a strong presumption that a worker is an employee unless certain conditions are met.
- In 2006, New Jersey adopted a more stringent definition of “employee” and improved the coordination of enforcement actions between state agencies.
- In 2009, Maryland passed the Workplace Fraud Act of 2009, which covers employers in the construction or landscaping industries and presumes that all individuals performing work for pay are employees, unless the employer can establish that the individual qualifies for a special exemption.
- Colorado, Illinois, Massachusetts, New Jersey and New Mexico have all passed laws aimed at misclassification in the construction industry. Iowa, Michigan, New York and Wisconsin have all created taskforces designed to uncover misclassification.
If you have questions about proper classification of independent contractor service providers, or if you receive notice of a proposed employment tax related audit, please contact a member of our Tax or Employment Practices and we will be happy to assist.
