Obama and the Independent Contractor Classification – Change You Need to Know Now!
“May you live in interesting times” is a fitting description of the modern economic era. Today’s business executives are certainly fulfilling this sentiment but many are unsure whether to consider it a blessing or a curse. The media is filled with stories of economic uncertainty, massive government “bail-outs” and a confidence crisis of unparalleled proportion. Combined with the typical change of guard associated with the election of a new President, it should come as no surprise that planning and preparation is a top priority for business owners across the nation as they brace for certain – albeit unknown – changes.
One proposal that has profound implications on the way business will be conducted in the future is the Obama-Durbin Independent Contractor Proper Classification Act of 2007. As Federal expenditures expand due to budget deficits and unprecedented spending, tax revenues continue to shrink – rapidly; leaving the government desperate to close the $345 billion tax gap via any method possible. One popular proposal gaining a great deal of momentum is the Obama-Durbin “pro-labor legislation” contained in the ICPC ACT of 2007.
High Stakes
According to the open letter to Secretary Paulson from Senator Obama, misclassification of workers accounts for $6 to $8 billion in uncollected federal taxes and represents a major loss of revenue during a time when state and federal government is faced with growing deficits. Given the high stakes and overwhelmingly Democratic congress it is reasonable to expect the bill to be passed should Senator Obama be elected as President in November.
Goals
The goals of the ICPC ACT include the following:
- Increasing Tax Revenues. According to information taken directly from BarackObama.com, closing the Section 530 safe harbor tax “loophole” and tightening restrictions on the definition of worker classifications would result in increased unemployment insurance taxes, income taxes and Workers Compensation premiums.
- Encourage cooperation between the IRS and Department of Labor to enforce the law and enact more stringent oversight, audits and reviews of potential violations.
- Enforcement of federal tax and employment laws including more serious penalties for improper classification of employees.
- Elimination of Safe Harbor provisions for industries with higher than average percentages of employees classified as Independent Contractors.
Disturbing Trends
- Worker misclassification now accounts for 30 percent of IRS audits.
- Worker classification enforcement now represents the largest single tax enforcement program.
- Incentives for state audit agencies. The DOL requires states to prove the effectiveness of their audit programs and states are aggressively pursuing this goal. New software programs adopted by several state Unemployment Insurance agencies analyze IRS 1099′s for common “red flags” which automatically trigger an audit.
Bottom Line Implications for Business
As it currently stands, the implications for big business are extensive and include more than just higher taxes. Should this bill become law, business entities of all sizes may find themselves following in the footsteps of recent high profile employee misclassification cases like Microsoft ($97 million), FedEx (Estimated $1 billion), Staples, Time-Warner, Allstate, and others. In addition to higher taxes, employers can expect a lot of red tape, expensive reporting and regulatory requirements, class action lawsuits, visits from state auditors and severe penalties for violations.
A few of the most important highlights of the proposed bill include:
- Employee initiated evaluation of classification by IRS. If passed, the law directs IRS to create a process for workers to request a classification review as well as IRS audit of employer if/when employees request a review. The new bill provides for stringent oversight to prevent retaliation against employees who submit a review request – including payment of legal fees for any worker found to have been misclassified.
- Retroactive reclassification of employees deemed improperly classified in the past as well as elimination of Safe Harbor guidelines that use industry classification examples as a foundation for their own classification decision.
- Employers must notify Independent Contractors of their federal tax obligations and right to seek classification determination review by IRS.
Steps to Take Now
Any business that utilizes the services of Independent Contractors, should begin a comprehensive review of their current employee classification system with an emphasis on understanding how newly proposed state and federal legislation could impact the company. It is a good idea to begin implementing internal reviews in preparation for anticipated changes to avoid triggering audits or facing potential litigation from employees.
Other important considerations to keep in mind include:
Creation of Independent Contractor contracts.
- Review of industry and position specific classification standards and best practice guidelines.
- Understand statutory employees and the relationship of time in determining worker classification status.
- Calculate tax and other financial impact required to comply with proposed regulations.
- Analysis of fringe benefits provided to workers and classification implications.
- Understanding of Form 8910 which allows current Independent Contractors to dispute their classification when filing income taxes…and provides potential audit alerts to IRS at the same time.
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