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Election Year Politics and Worker Classification Issues

Tax form 8952

We are in the midst of a presidential election year, and the issue of worker classification has surfaced as a labor and tax policy issue, as it normally does.  At a January 20, 2012, small business tax roundtable held by Tax Analysts, Reggie Oldak, one of the senior counsels for the National Women’s Law Center, criticized the “20 common law factors” test (used in defining who is an independent contractor or an employee) as rigged against the worker. She went on to complain that “the IRS is prevented from really devoting the energy it needs to proper [worker] classification.”  In her opinion, employers have the upper hand in employment status matters and independent contractors have no workplace protections.    

For decades, worker classification cases have been a significant bone of contention for the IRS, and an emotionally charged issue for all involved. Businesses that hire workers as independent contractors save money on federal employment taxes, and the independent contractors may view themselves as entrepreneurs who don’t need those protections. Determining whether a worker should be treated as an employee or as an independent contractor depends upon a facts-and-circumstances test revolving around a common-law test of whether the service recipient has the right to direct and control how the worker performs those services.

IRS revenue agents often take the position that these workers are misclassified and that a business profiting from the skills of these workers owes a large federal employment tax bill. Sometimes the IRS wins such cases against business taxpayers based on the common law; under other circumstances, it finds itself stymied from pursuing a case due to a 1978 law that prohibits the IRS from defining the term “independent contractor” by regulation. That law also provides potential safe harbors to employers who use workers as independent contractors, which can serve as a defense against an IRS attempt to reclassify the firm’s workers as employees.

The Obama Administration, which appears sympathetic to Ms. Oldak’s views, has taken a number of steps over the last several months designed to bring public attention to worker classification issues.  In September 2011, President Obama included a worker classification provision in his plan “Living Within Our Means and Investing in the Future: The President’s Plan for Economic Growth and Deficit Reduction.”  And, most recently, the IRS held a webinar on worker classification for tax professionals and taxpayers on February 15, 2012. (If you didn’t have a chance to watch the webinar, you can catch the archived version at the IRS video portal.)

In addition to the webinar, the IRS has taken a series of other significant steps to address worker classification.  On September 21, 2011, the IRS issued Announcement 2011-64 establishing a new voluntary classification settlement program (VCSP) “that provides partial relief from federal employment taxes for eligible taxpayers that agree to prospectively treat workers as employees.”

From a regulatory perspective, the IRS will continue to offer its classification settlement program to businesses that it believes are misclassifying workers as independent contractors. And with respect to congressional action on the President’s jobs plan or even a separate worker reclassification bill, the chances of passage during 2012 are unclear, given the upcoming national election and the fact that the Senate and House are controlled by two different parties. The only certainty in all of this is that worker classification issues will remain emotional and controversial. 

What do you think?

Benson Goldstein, J.D., Senior Technical Manager – Taxation, American Institute of CPAs. Benson serves as the AICPA's liaison before the IRS's four operating divisions regarding examination, collection, and other compliance matters; and as staff liaison on tax administration and compliance policy issues to the AICPA's IRS Practice and Procedures Committee.  He has a law degree from the State University of New York at Buffalo.

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